John Jones won a lottery that will pay him $1,000,000 after twenty years.Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

Question

Quizplus · Accepted Answer

We can use the present value formula to calculate the present value of the $1,000,000 lottery winning.

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods.

In this case, FV = $1,000,000, r = 5%, and n = 20.

PV = $1,000,000 / (1 + 0.05)^20
PV = $1,000,000 / 2.6533
PV = $376,888.76

So the present value of the $1,000,000 lottery winning is $376,888.76, which is closest to answer choice B ($2,653,300 is incorrect as it is the future value, not the present value).

John Jones Won a Lottery That Will Pay Him $1,000,000