Hooray! You won the lottery, but you have a choice of taking the $20,000 per year for the next 20 years or taking a lump settlement today. What would be the minimum amount you would accept today if you decide that 8% is a reasonable discount rate

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Business

Margaret Lowe

3 January, 19:16

Hooray! You won the lottery, but you have a choice of taking the $20,000 per year for the next 20 years or taking a lump settlement today. What would be the minimum amount you would accept today if you decide that 8% is a reasonable discount rate

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Answers (1)

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Brittany Maxwell · Answer 1

The minimum value is $196,362.95

Explanation:

Giving the following information:

Cash flow = $20,000

The number of years = 20 years

Interest rate = 8%

First, we need to calculate the future value of the cash flows. We will use the following formula:

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

A = cash flow

FV = {20,000*[ (1.08^20) - 1]} / 0.08

FV = $915,239.29

Now, we can calculate the present value. The present value is the minimum value yo accept.

PV = FV / (1+i) ^n

PV = 915,239.29 / 1.08^20

PV = $196,362.95