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# Calculating Present Value of Winnings from Lottery

In August 1994, the Wall Street Journal reported that the winner of tile Massachusetts State Lottery prize had the misfortune to be both bankrupt and in prison for fraud. The prize was \$9,420,713, to be paid in 19 equal annual installments. (There were 20 installments, but the winner had already received the first payment.) The bankruptcy court judge ruled that the prize should be sold off to the highest bidder and the proceeds used to pay off the creditors.

a. If the interest rate was 8 percent, how much would you have been prepared to bid
for the prize?

b. Enhance Reinsurance Company was reported to have offered \$4.2 million. Use
Excel to find the return that the company was looking for.

#### Solution Preview

Please refer attached document for complete solution. Work done with the help of equation writer may not print here.

Solution:

a)
Value of Each Investment=495827

Present Value of Equity at 8% for 19 years = Value of Each ...

#### Solution Summary

Solution describes the steps in calculating present value of winnings from a lottery.

\$2.19