Edward Hughes has just won the state lottery and has the following three payout options for after-tax prize money: 1. $166,000 per year at the end of each of the next six years
2) $306,000 (lump sum) now
3) $518,000 (lump sum) six years from now
The annual discount rate is 9%. Compute the present value of the second option. (Round to nearest whole dollar.)
Present value of $1:
$$\begin{array} { | c | r | r | r | }
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.681 & 0.650 & 0.621 \
\hline 6 & 0.630 & 0.596 & 0.564 \
\hline 7 & 0.583 & 0.547 & 0.513 \
\hline
\end{array}$$

Question

Edward Hughes has just won the state lottery and has the following three payout options for after-tax prize money: 1. $166,000 per year at the end of each of the next six years
2) $306,000 (lump sum) now
3) $518,000 (lump sum) six years from now
The annual discount rate is 9%. Compute the present value of the second option. (Round to nearest whole dollar.)
Present value of $1:
$$\begin{array} { | c | r | r | r | } 
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.681 & 0.650 & 0.621 \
\hline 6 & 0.630 & 0.596 & 0.564 \
\hline 7 & 0.583 & 0.547 & 0.513 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The present value of the second option, which is a lump sum payment of $306,000 now, does not need to be discounted because it is already in present value terms. The discount rate and the present value of $1 table are not needed for this calculation.

Edward Hughes Has Just Won the State Lottery and Has