Lotta Dough just won the state lottery and has elected to receive $50,000 per year for 20 years in the form of an annuity due. What is the present value of this stream of payments if money can earn 6 percent annual interest?
A) $500,000
B) $607,905
C) $607,004
D) $900,706

Question

Quizplus · Accepted Answer

The present value of an annuity due can be calculated using the formula: $PV = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right) \times (1 + r)$, where PMT is the annual payment ($50,000), r is the annual interest rate (6% or 0.06), and n is the number of periods (20 years). Plugging in the values: $PV = $50,000 \times \left(\frac{1 - (1 + 0.06)^{-20}}{0.06}\right) \times (1 + 0.06)$, which calculates to approximately $607,905.

Lotta Dough Just Won the State Lottery and Has Elected