Question

Suppose that you entered a church raffle and won first prize! As your reward, you will receive a cash payment of $1,000 a month for the next 10 years. Assuming that you can earn 7 percent on your money, what is this prize worth to you today?

A.$86,126.35

B.$78,411.06

C.$85,333.33

D.$81,338.40

Answer 1

The amount is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 7% / 12 (Since the payments are on monthly basis, hence divided by 12)

= 0.58333333%

n is computed as follows:

= 10 x 12 (Since the payments are on monthly basis, hence multiplied by 12)

= 120

So, the amount will be as follows:

= $ 1,000 x [ (1 - 1 / (1 + 0.00583333333)¹²⁰ ) / 0.0058333333 ]

= $ 1,000 x 86.12635906

= $ 86,126.35 Approximately

So, the correct answer is option A.

Feel free to ask in case of any query relating to this question