38) A lottery ticket states that you will receive $250 every year for the next ten years. a. What is the present value of the winning lottery ticket if the discount rate is 6% and it is an ordinary annuity? b. What is the present value of the winning lottery ticket if the discount rate is 6% and it is an annuity due? c. What is the difference between the ordinary annuity and annuity due?

Instructions are listed below.

Explanation:

Giving the following information:

A lottery ticket states that you will receive $250 every year for the next ten years.

A) i=0.06 ordinary annuity

PV = FV / (1+i) ^n

FV = {A*[ (1+i) ^n-1]}/i

A = annual payment

FV = {250*[ (1.06^10) - 1]}/0.06 = $3,295.20

PV = 3,295.20/1.06^10=1,840.02

B) i=0.06 annuity due (beginning of the year)

FV = 3,295.20 + [ (250*1.06^10) - 1] = $3492.91

PV = 3492.91/1.06^10 = $1,950.42

C) The interest gets compounded for one more period in an annuity due.