(Q. 9 IN B) PRIZES ARE OFTEN NOT “WORTH” AS MUCH AS CLAIMED. PLACE...
4. (Q. 9 in B) Prizes are often not “worth” as much as claimed. Place a value on
a prize of $5,000,000 that is to be received in equal annual payments over the
next 20 years, with the first payment beginning today. Assume an interest rate of
7 percent over the 20-year period.
A) $2,212,652
B) $2,648,504
C) $2,833,899
D) $2,950,567
Answer C
Annual payment = $5,000,000 / 20 = $250,000
1
−
+
i
n
i
(1 i)
(for annuities due)
PV = PMT + PMT
−
.
19
07(1.07)
.07
= $250,000 + $250,000
= $250,000 + $250,000 [10.3356]
=$2,833,898.81.