Winners of the Georgia lotto drawing are given the choice of receiving the winning amount divided...

Question:

Winners of the Georgia lotto drawing are given the choice of receiving the winning amount divided equally over 21 years or as a lump sum cash option amount. The cash option amount is determined by discounting the annual winning payment at 8% over 21 years. This week the lottery is worth $1 million to a single winner. What would the cash option payout be?

Lottery Winnings:

Most lotteries pay out their prizes in annual installments over a long period of time. For that reason, the value of the winnings is usually different from the advertised value.

Answer and Explanation: 1

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Let,

  • PMT = periodic payment,
  • n = number of periods,
  • r = interest rate.

We will assume that the $1 mil is the annual payment. The present value of the...

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How to Calculate the Present Value of an Annuity

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Chapter 8 / Lesson 3
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Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.


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