Gregg recently won 1000000 in the lottery He was offered a l

Gregg recently won $1,000,000 in the lottery. He was offered a lump sum payment of $1,000,000 today or an annuity of $80,000 per year for 20 years. Use this information to answer questions 4 and 5. Round your answers to the nearest whole dollar (example: 5048).

4) What is the present value of the lump sum payment?

5) Using a discount rate of 5%, what is the present value of the annuity?

Solution

4) Present value of lump sum payment ==$1,000,000

5) Present value of an Annuity = Annuity * Cumulative present value factor

        = $80000 *12.46

        = $996976.827

Note: Cumulative PV factor @ 5% for 20 years is 12.46 ((1/1.05) ^20)