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You win a lottery with a prize of $1.5 million. Unfortunately, the prize is paid in 10 annual installments. The first payment is next year. How much is the prize really worth? The discount rate is 8%.
Answer : Prize = $1.5million Installments = 10 Discount rate = 8% Each installment = $150,000 Hence , the real worth of prize will equal to the present value Present value =150,000/(1+0.8) +150,000/(1+0.8)^2 +150,000/(1+0.8)^3 + ……………………

0/(1+0.8)^10 Using formulae for GP series =150,000/(1+0.8) [1 – (1/1.08)^10)/ (1 – 1/1.08) ] = 138889 * 7.24 = $1,006,006 Therefore , the real worth of prize is$1,006,006

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