Question

1.) You just won the $85 million lottery. You will receive $2.6 million a year for the next 30 years plus an additional payment of $7 million at the end of 30 years. The interest rate is 6 percent.

How much is your lottery prize worth today?

2.)If you owe $51,000 payable at the end of eight years, what amount should your creditor accept in payment immediately if the interest rate on the loan is 13 percent?

3.) You have decided to start saving money for your future. What is the future value of a 13-year annuity of $2,800 per year, assuming that you make your first payment today and the interest rate is 9 percent?

Answer 1

1) Present value of annuity for 30 years at 6% is 13.765

Present value of 2.6 million received every year for 30 years is 2.6 million X 13.765 = 35.789 million (A)

Present value of 7 million received after 30 years is 7 million X 0.1741 = 1.2187 (B)

(A) + (B) = 37.0077 million

2) Present value of $51,000 at 13% payable after 8 years is   

$51,000 X 0.3762 = $19,186.2

3) Future value of $2,800 at 9% for 13 years annuity   

$2,800 X 22.953 = $64,268.4