A person recently won a state lottery

Finance Jan 13, 2021

A person recently won a state lottery. The terms of the lottery are that the winner will receive annual payments of $20100 at the end of this year and each of the following 3 years. If the winner could invest money today at the rate of 8 percent per year compounded annually, what is the present value of the four payments?

Expert Solution

Given that future cash flows at the end of year and next three years ,total 4 years = $20100

Interest rate = 8%

We know that present value of future cashflows of n years = cash flow x PVAF ( interest rate, n)

Where PVAF (Interest rate,n ) means present value annuity factor of interest rate for n number of years

Hence present value of future cashflows :

= 20100 x PVAF (8% , 4)

= 20100 X 3.3121

= $66573.21

Hence present value of 4 payments is $66573.21

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