Your friend just won the lottery.He has a choice of receiving $50,000 a year for the next 20 years or a lump sum today.The lottery uses a 15% discount rate.What would be the lump sum amount your friend would receive?

Question

Quizplus · Accepted Answer

The lump sum amount can be calculated using the present value formula for an annuity: PV = P * [(1 - (1 + r)^-n) / r], where P is the payment amount ($50,000), r is the discount rate (15% or 0.15), and n is the number of periods (20 years). Plugging in the values: PV = $50,000 * [(1 - (1 + 0.15)^-20) / 0.15] ≈ $312,967.

Your Friend Just Won the Lottery