Time value and discount rates Personal Finance Problem You just won a lottery th

Question

Time value and discount rates Personal Finance Problem You just won a lottery that promises to pay you $1,000,000 exactly 10 years from today. Because the $1,000,000 payment is guaranteed by the state in which you live, opportunities exist to sell the claim today for an immediate single cash payment. (1) 6% a. What is the least you will sell your claim for if you can earn the following rates of return on similar-risk investments during the 10-year period? (2) 9% (3) 12% b. Rework part a under the assumption that the $1,000,000 payment will be received in 15 rather than 10 years. c. On the basis of your findings in parts a and b, discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum

Explanation / Answer

a)
1
=1000000/1.06^10=558394.8
2
=1000000/1.09^10=422410.8
3
=1000000/1.12^10=321973.2

b)
1
=1000000/1.06^15=417265.1
2
=1000000/1.09^15=274538
3
=1000000/1.12^15=182696.3

c

Option D..as evident from the above calculations presetn value is inversely proportional to the time period and discount rate or the lower the discount rate higher the present value and lower the time period higher the present value

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