posted by Connie .
Sarah just won a $3,000,000.00 lottery. According to the lottery they will pay her a lump sum of $500,000.00 on October 1, 2012 and the balance in equal annual installments for 10 years.
Assuming that you are the director of the lottery, how much must you have in the account to pay Sarah her initial payment and the 10 remaining payments. Also assume that you have a discount rate of 6%
Are we to assume they going to pay out the 3 Million dollar win with a payment of $500,000 now followed by 10 annual payments of 250,000 ?
(Then she did not really win $3 million, since "time is worth money" )
According to the wording it seems like that is the assumption, so
present value = 500,000 + 250000(1 - 1.06^-10)/.06
A more realistic question would have been, to find each of the 10 annual payments plus the present payment of 500,00 which would be equivalent to 3 million now.