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A $1,000,000 lottery prize pays $50,000 per year for the next 20 years. If the current rate of return is 4.25%, what is the present value of this prize? (Assume the lottery pays out as an ordinary annuity. Round your answer to the nearest cent.)

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beritop1089

Answer:

$664,718.29

Explanation:

This is an ordinary annuity question as there are recurring fixed payments for a specified period of time; 20 years in this case;

Using a financial calculator, solve this question using the following inputs;

Recurring payment; PMT = 50,000

Total duration of investment ; N = 20

Interest rate; I/Y = 4.25%

Future value is not given, but because this is an annuity, use 0; FV = 0

then CPT PV = 664,718.29

Therefore, $664,718.29 is the present value of this prize.

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