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Present Value of Annual Cash Flow

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You win the lottery for $20 million!
You have a choice to take $1 million now and $1 million for the next 19 years
OR take $10.6 million today.
Assume you expect to earn 6% on your investments.

Hint: You are actually comparing a 19 year annuity @ $1 million a year vs. $9.6 million ($10.6 minus $1). You need to find out what discount rate gets you to a PV of $9.6 million today on the 19 year annuity of $1 million a year.

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Solution Summary

This solution contains step-by-step calculations to determine the present value of annual cash flows.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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