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16 December, 07:50

You've just won the lottery, congratulations. You and your heirs will receive $35,000 per year forever, with the first payment received at the end of the first year. If the appropriate discount rate is 8%, what is the present value of your prize?

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  1. 16 December, 09:37
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    Present Value = $437,500

    Explanation:

    Giving the following information:

    You and your heirs will receive $35,000 per year forever, with the first payment received at the end of the first year. The appropriate discount rate is 8%.

    We need to find the present value of a perpetual annuity. To do that, we will use the following formula:

    PV = Cf/i

    Cf = cash flow = 35,000

    i = 0.08

    PV = 35,000/0.08 = $437,500
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