# Present value question!

• Jan 29th 2008, 01:14 PM
DooBeeDoo
Present value question!
You have just won £60 million in the lottery. The lottery promises to pay you £20 million at the end of each year for the next three years. If the market rate of interest is 7 percent, how much money would you accept today in exchange for the three £20 million payments?

any ideas?? I'm not too good at this stuff
• Jan 29th 2008, 04:15 PM
colby2152
Quote:

Originally Posted by DooBeeDoo
You have just won £60 million in the lottery. The lottery promises to pay you £20 million at the end of each year for the next three years. If the market rate of interest is 7 percent, how much money would you accept today in exchange for the three £20 million payments?

any ideas?? I'm not too good at this stuff

$A \Rightarrow 20Ma_{\bar{3}|} = \sum_{n=1}^3 20M(1.07)^{-n}$
• Jan 30th 2008, 05:10 AM
TKHunny
Quote:

Originally Posted by colby2152
$A \Rightarrow 20Ma_{\bar{3}|} = \sum_{n=1}^3 20M(1.07)^{-n}$

"how much money would you accept today "

Colby's answer is good but I'm not certain it answers the question. You wouldn't be studying a chapter in Utility, would you? If the value of money changes by more that a prevailing interest rate, then there is another value that is a better answer. For example, if you have no debts right now, but will owe $20MM in one year, that first delayed payment may be worth far more then than the discounted value today. "I'm not too good at this stuff" No need to talk like that. Practice. GET good at it. • Jan 30th 2008, 06:11 AM DooBeeDoo Quote: Originally Posted by TKHunny "how much money would you accept today " Colby's answer is good but I'm not certain it answers the question. You wouldn't be studying a chapter in Utility, would you? If the value of money changes by more that a prevailing interest rate, then there is another value that is a better answer. For example, if you have no debts right now, but will owe$20MM in one year, that first delayed payment may be worth far more then than the discounted value today.

"I'm not too good at this stuff"

No need to talk like that. Practice. GET good at it.

It's a risk management course, not utility.
• Jan 30th 2008, 06:24 AM
colby2152
Quote:

Originally Posted by DooBeeDoo
It's a risk management course, not utility.

What I showed you was a simple annuity with payments at the end of the year. It's value is the present value of those three 20M payments.