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Homework answers / question archive / Incorrect Question 3 0 / 4 pts You recently won a lottery prize that is paid out as an after-tax lump sum payment of $1 million

Incorrect Question 3 0 / 4 pts You recently won a lottery prize that is paid out as an after-tax lump sum payment of $1 million

Finance

Incorrect Question 3 0 / 4 pts You recently won a lottery prize that is paid out as an after-tax lump sum payment of $1 million. You reinvest this lump sum in a portfolio earning 9% per year. You want to withdraw money from this portfolio at the end of each year for the rest of time and you want your withdrawals to increase 3% per year. If your first withdraw is one year from now, how much will your second withdraw be? $90.000 $120.000 $61.800 $60,000

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This is the case of growing perpetuity. We can determine the required values by using formula..

PV = A/(r -g)

1000000 = A/0.09 - 0.03

A = 1000000*0.06 = 60000

Here A is first withdrawal i.e. $60000 second withdrawal will grow @ 3%

therefore,

Second withdrawal = A(1+g) = 60000*(1+0.03) = $61800

Correct Answer is C 61800

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