If you won the lottery and were offered to receive $25,000 a year from now, and $25,000 two years from now, or to receive an alternate sum today, given that the interest rate is 5%, how much would you expect to receive today:

Question

Quizplus · Accepted Answer

The present value of $25,000 in one year is $25,000 / (1 + 0.05) = $23,809.52. The present value of $25,000 in two years is $25,000 / (1 + 0.05)^2 = $22,675.73. The total present value of the two payments is $23,809.52 + $22,675.73 = $46,485.25.

If You Won the Lottery and Were Offered to Receive