question archive Jill has just won the lottery
Jill has just won the lottery
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Jill has just won the lottery. She will receive semi-annual payments of $49,000 commencing in 6 months time and growing at 0.8% each half-year, forever. If the interest rate is 10.5% per annum compounded semi-annually, the value of this stream of cash flows today is (to the nearest whole dollar; don't include $ sign or commas): Answer:
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Present value of perpetuity= C/(r-g)
Where C= Periodical cash flow (given as $49,000), r= interest rate per period (given as 10.5% compounded semi annually, or 10.5%/2= 5.25% semi annually) and g= growth rate per period (given as 0.8%)
Plugging the inputs,
Present value of the payments= 49000/(0.0525-0.008)
=49000/0.0445= 1101124
