Question

The super prize in a contest is $10 million. This prize will be paid out in equal yearly payments over the next 10 years. If the prize money is guaranteed by AAA bonds yielding 6% and is placed into an escrow account when the contest is announced 1 year before the first payment, how much do the contest sponsors have to deposit in the escrow account? (Round your answer to the nearest cent.)

Answer 1

Sponsors have to deposit amount that is equal to present value of future cash flows.
Present value	=	Annual cash flow	*	Present value of annuity of 1
	=	$       10,00,000	*	7.360087
	=	$ 73,60,087.05
Working:
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.06)^-10)/0.06		i	6%
	=	7.360087051		n	10