Question

WHY IS THIS THE ANSWER?

(1) You’ve just won the state lottery and will receive 20 annual payments of $70,000, with the first payment arriving 1 year from today. It is easy for you to borrow or lend on the capital market at an interest rate of 8% per year. If someone offered to buy your stream of winnings for a one-time payment of $1,000,000, would you sell?

Answer: Yes, you could discount each payment to find the present value of the 20 cash flows and determine that the total present value is $687,270. But there is a more intuitive way of thinking about this. If you accepted the $1,000,000 payment today, you could invest this at 8% and withdraw the $80,000 interest you earn every year forever. Notice that you will be better off in this situation, so accepting the $1,000,000 today is the better choice.

Why

Answer 1

present value of future cash flows can be calculated using PV function on a calculation or using annuity formula PVA = PMTA (1/i - 1/(i times 1 + i)^n) = 70, 000 times (1/8 % - 1/(8 % times (1 + 8 %)^20) = $ 687, 270.32 Hence, mis steam of cash flow is with the above sum to you If someone others you $ 1, 000,000 for it, you should certainly see it.