Milena T. answered • 10/01/19
Experienced Professor, Researcher, and Tutor in Finance and Economics
Dorothy Taylor has won a state lottery and will receive a payment of $93,000 every year, starting today, for the next 20 years. If she invests the proceeds at a rate of 5.76 percent, what is the present value of the cash flows that she will receive? (Round factor values to 4 decimal places, e.g. 1.5212 and final answer to nearest whole dollar, e.g. 5275.)
This story problem refers to an annuity due. The phrase "starting today" is the clue we are receiving payments at the beginning of each time period, as opposed to an ordinary annuity where it is assumed we receive payment at the end of a time period. If you are using Excel or a financial calculator, you will need to set up your problem to reflect this or you will get an incorrect answer.
Your number of time periods, or N, is the number of years. This is standard.
Unless stated otherwise, interest rates are also expressed in years, and you can enter your INT at the stated rate in the problem.
You will likely need to solve this in two parts, most financial calculators are set up to find the Future Value or FV of an annuity. The question is asking for present value. So you will first find the FV, then discount it back at the appropriate interest rate for N years to find the present value.
