CFA Practice Question

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CFA Practice Question

Congratulations, you have won the lottery! Your prize is 50 payments of $200,000. The payments will be made at the end of each of the next 50 years. You plan to invest the payments at a rate of 7% per year. What is the present value of your lottery prize?
A. $10,000,000.00
B. $2,953,359.71
C. $2,760,149.26

User Contributed Comments 9

User Comment
mansi can any one please explain how to do it with the calculator?
flobeebhead PMT = $200,000, n = 50, i = 7, FV = 0, solve for PV
CFAlearner I tried that and get $8,412,918.59. What am I doing wrong?
jalbr270 You must divide i by 12.
Allen88 I used the Present Value Annuity formula and got the correct answer. @jalb, i don't think you need to divide by 12.
BmyOwnBoss I entered in the formula as you noted flobeebhead in baII plus however i get 2,675,027.96 instead.. what could be the problemo?
ksnider if you calculate it using the CF function on the calculator you get the correct answer
dipu617 In the BA II Plus, Texas Instrument:
PMT= 200,000; I/Y=7; N=50;
[CPT]
PV= -2,760,149.26
kingdave this is a present value of annuity because you have a cash flow received which is reinvested each time at the rate 7%, which is the discounting factor
you can get the discounting annuity value by doing, ((1+0.07)^50-1)/(0.07*(1+0.07)^50), and then you multiply it by the cash flow in this case which is 200,000
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