Question

Suzie just won the lottery! As her prize, she will receive $2500 a month for the next 10 years. The first payment will be paid today. At 6%, compounded monthly, what is her prize worth today?

Answer 1

This question is a form of annuity and since payments are received at the beginning of each month (first paid today and rest at beginning of each month), it is a form of annuity due.

Present value of an annuity due is computed as follows -

where, PV = Present value, A = annuity, r = periodic rate of interest, n = no. of time periods

Since we are given monthly payments, we require monthly interest rate and no. of months.

Monthly interest rate (r) = 6% / 12 = 0.5%, No. of months (n) = 10 * 12 = 120, A = $2500

Therefore, Present value of her prize is $226,309.55.