A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%. Show work

Answer is $6,079,058.25

Explanation:

This is a simple present value problem.

Present value of annuity shows the worth of annual payments which is present.

As per the given statement, grand prize of lottery is $10 million. This is payable over 20 years at $500,000 per year. The interest rate is 6%.

To find the real worth of the grand prize, each $5 million payment must be "brought back" to their current value at a 6% per year rate.

N = 20; PMT = 500,000; FV = 0; I = 6%; Payments in BEGIN mode.

PV = Cash flow / (1+rate of return) to the power n

PV will be addedc exponential power 20 times giving answer as $6,079,058.25

Hence, PV = $6,079,058.25