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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Use Future Value and Present Value Tables to Apply Compound Interest to Accounting Transactions

Barb Muller wins the lottery. She wins 520,000 per year to be paid for 10 years. The state offers her the choice of a cash settlement now instead of the annual payments for 10 years.

Required:

If the interest rate is 6%, what is the amount the state will offer for a settlement today? (Note: Round answers to two decimal places.)

To determine

Concept introduction:

Time value of money:

Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.

To calculate:

The present value of the lottery.

Explanation

The present value of the lottery is calculated as follows:

Annuity Amount (A) $ 20,000
Annual return % 6%
...

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