Question

A local magazine is offering a $10,000 grand prize to one lucky winner. The prize will be paid in five annual payments of $2,000 each, starting one year after the drawing. How much would this prize be worth to you today if you can earn 8 percent on your money?

A.

$5,550.50

B.

$5,925.24

C.

$6,050.82

D.

$7,985.42

E.

$8,624.25

Answer 1

Correct Option is Option D

We have 3 mehods to solve this question

1. Financial Calculator

We have the followiing information

N = 5

I/Y = 8

PMT = 2000

We have to inpiut these information in a financial calculator and then press CPT PV

we will get the present value as 7,985.42

2. Excel

Year	Cash Flow	Present Value factor	Present Value
1	2000	0.93	1,851.85
2	2000	0.86	1,714.68
3	2000	0.79	1,587.66
4	2000	0.74	1,470.06
5	2000	0.68	1,361.17
		Present worth of prize	7,985.42

3. Present Value annuity factor

Present worth = Annual cash flow * Present Value Annuity Factor 8%. 5 Years

Present worth of prize = 2000 * 3.99 = 7,985.42