Bill Jones has just won the state lottery and has the following three payout options for after-tax prize money
1. $170,000 per year at the end of each of the next six years
2. $312,000 (lump sum) now
3. $508,000 (lump sum) six years from now
The annual discount rate is 9%. Compute the present value of the first option. (Round your answer to the nearest whole dollar.)
Present value of an ordinary annuity of $1:
8% 9% 10%
1 0.926 0.917 0.909
2 1.783 1.759 1.736
3 2.577 2.531 2.487
4 3.312 3.240 3.170
5 3.993 3.890 3.791
6 4.623 4.486 4.355
7 5.206 5.033 4.868
Present value of $1:
8% 9% 10%
1 0.926 0.917 0.909
2 0.857 0.842 0.826
3 0.794 0.772 0.751
4 0.735 0.708 0.683
5 0.681 0.650 0.621
6 0.630 0.596 0.564
7 0.583 0.547 0.513
A) $850,000
B) $762,620
C) $482,000
D) $457,251
B .B)
Present value of the lottery receipts under the first option:
Net cash Annuity
Time inflow PV Factor Present Value
1-6 years Cash flow $170,000 4.486 $762,620
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