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You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $50,000 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

Respuesta :

Answer:

The correct answer is $925,925.92.

Explanation:

According to the scenario, the given data are as follows:

Payment = $50,000

Increase rate = 2.5%

Discount rate = 7.9%

So, we can calculate the present value of your prize by using following formula:

Present value = total payment / (discount rate - increase rate)

= $50,000 / (7.9% - 2.5%)

= $50,000 / 5.4%

= $50,000 / 0.054

= $925,925.92

Hence the present value of prize is $925,925.92.

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