The Caldwell Herald newspaper reported the following story: Frank Ormsby of Cald

Question

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state's newest millionaire. By choosing the six winning numbers on last week's state lottery, Mr. Ormsby won the week's grand prize totaling $1.22 million. The State Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of $61,000 each Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required 1. If Mr. Ormsby can invest money at a 10% rate of return, what is the present value of his winnings? Present value

Explanation / Answer

Answer:

Annual Payment = $61,000
Number of Payments = 20
Annual Interest Rate = 10%

Present Value of Winnings = $61,000 * PVA of $1 (10%, 20)
Present Value of Winnings = $61,000 * 8.5136
Present Value of Winnings = $519,329.60

So, present value of Mr. Ormsby’s winning is $519,329.60

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