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annuity question.

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  • annuity question.

    I was working on the following question.

    John wins $1000000 in a lottery and will be paid 20 equal annual installments of $50,000 with the first payment due today. A bank offers to exchange John's winnings for a perpetuity of $X per month with the first payment due today. Find the value closest to $X assuming a 10% effective rate of interest.

    The only question is: In the solution to this question they stated:

    PV of John's prize = 50,000a.._20|.10 = 468,246. But I thought that 1000000 is the present value of this annuity.

    Could someone explain this?

    Thank you.

  • #2
    Let's say you win the lottery for 10million dollars. Usually, they have a payment plan of something like a million dollars for 10 years or 500,000 for 20 years. You can't take a lump sum of 10 million dollars. In other words, the total amount of money you receive is 10 million dollars, but the present value is less.
    Whether you are the lion or the gazelle, when the sun comes up, you better be running.

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    • #3
      Basically state lotteries are a rip-off. Well, for reasons besides the obvious.

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