Linus has just won the Wait To Spend lottery. Specifically Linus .pdf
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Linus has won a lottery of $1650 but must wait 10 years to receive it. He prefers $225 now and an unknown lump sum in 10 years, which needs to be calculated to match the present value of his lottery winnings. Using a 5.50% interest rate, the unknown lump sum he will receive is $1265.67.
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Linus has just won the Wait To Spend lottery. Specifically Linus .pdf
- 1. Linus has just won the "Wait To Spend" lottery. Specifically Linus has won the lump sum amount of $1650 but he must wait until the end of 10 years to receive the money. Linus is in need of cash and would rather receive a different pattern of payments: $225 today and then receive some unknown lump sum amount that will be received in 10 years. Using an interest rate of 5.50%, determine the unknown lump sum amount that would make the present value of both prizes equivalent. Place your answer in dollars and cents. DO NOT USE A DOLLAR SIGN OR A COMMA IN YOUR ANSWER. Work out all analysis using at least four decimal places of accuracy. Solution Discount factor @5.5% for 1 years=1/1.055^10= 0.5854 Present value of $1650 receivable after 10 years= $ 965.96 So PV of Prize = $ 965.96 Second option : Cash receivable now 225.00 PV of remaining amount receivable 740.96 Future value of the lump sum amount receivable after 10 years=740.96*1.055^10 1,265.67 So Linus will receive $1265.67 after 10 years