Question

How much would you accept in a lump sum today, in place of a lottery payment of $35,000 at the end of the next 20 years ($700,000 in total), assuming you could invest it at a 6 percent rate?

	a.	$10,913 (rounded)
	b.	$8,028,946 (rounded)
	c.	$700,000 (rounded)
	d.	$401,447 (rounded)

Answer 1

Answer: Option-(d): $401,447 (rounded) Reason: 6% 20 $35,000 Annual interest rate, RATE # of years of receipts, NPER Annual year-end receipts, PMT Lumpsum receipt at the end, FV Annual receipt type, TYPE Lumpsum receipt today $o 0 = 0 if received at the end of each period; 1 if received at the beginning of each period. $401,447 [Ref: NOTE] NOTE: А Lumpsum receipt today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=6%; nper=20; pmt=-35000; fv=0; type=0. Here, value for pmt is negative as it denotes cash inflows; type = 0 because cash flows are received at the end of each year only. C D E F G H I J 1 Annual interest rate, RATE 6% 2 # of years of receipts, NPER 20 3 Annual year-end receipts, PMT $35,000 4 Lumpsum receipt at the end, FV $0 5 Annual receipt type, TYPE 0 = 0 if received at the end of each period; 1 if received at the beginning of each period. 6 Lumpsum receipt today =PV(B1,B2,-B3,-B4,B5) [Ref: NOTE]