The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire.

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr. Ormsby won the week’s grand prize totaling $1.48 million. The State Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of $74,000 each.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. If Mr. Ormsby can invest money at a 9% rate of return, what is the present value of his winnings? (Enter your answer in dollars and not in millions of dollars.)

Explanation

From Exhibit 13B-2, the factor for 9% for 20 periods is 9.129. Thus, the present value of Mr. Ormsby’s winnings is:

$74,000 × 9.129 = $675,546

Thanks