You have just won a lottery that promises to pay you and your heirs $1000 dollars a year forever . How much could you get for this stream of cash today if the interest rate is 6%?
A)$12,500
B)$16,667
C)$943
D)None of the above

Question

Quizplus · Accepted Answer

This problem involves finding the present value of a perpetuity. The formula for the present value of a perpetuity is PV = C/r, where PV is the present value, C is the cash flow (in this case, $1000), and r is the interest rate. Plugging in the values, we get PV = $1000/0.06 = $16,667. Therefore, the best choice is B, as this is the present value of the stream of cash flows.

You Have Just Won a Lottery That Promises to Pay