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16 March, 19:28

A local magazine is offering a $5,000 grand prize to one lucky winner. The prize will be paid in five annual payments of $1,000 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 8 percent on your money

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  1. 16 March, 22:22
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    The prize is worth $3,992.71

    Explanation:

    Giving the following information:

    Cash flow = $1,000 per year for 5 years

    Interest rate = 8%

    To calculate the value of the prize today, first, we need to calculate the final value:

    FV = {A*[ (1+i) ^n-1]}/i

    A = annual payment

    FV = {1,000*[ (1.08^5) - 1]}/0.08

    FV = $5,866.60

    Now, the present value:

    PV = FV / (1+i) ^n

    PV = 5,866.6 / (1.08^5)

    PV = $3,992.71
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