TVM14 - Present Value of an Annuity – Lottery example

Audio Transcript

This is a present value of an annuity problem in which the present value is the unknown.

You have just won $1,000,000 in your state’s weekly lottery. You will be receiving $50,000 per year for 20 years. Assuming an interest rate of 8.5%, what is the present value of that annuity?

This is a present value of an annuity problem, in which the present value is the unknown.

First, plug in the known values into the appropriate cells:

The number of periods  – NPER  – is 20

The interest rate – Rate – is 8.5%

The payment – PMT  – is $50,000

Going to the formulas tab, look for the PV function.

The function wizard pops up

Select Rate,

Select NPER,

Select PMT

Hit OK

The PV  is ($473,167)