Question: You win a lottery ticket with a prize of $1.5 million. The prize is paid in ten equal annual installments. The first payment is one year from today. Your bank offers you an interest rate of 1% per month (effective).
What is the present value of these payments? Work out the answer in two ways. First use the annuity formula. Be careful about which interest rate you plug into the formula. Second use Excel. Do not use the PV or NPV formulas in Excel. Instead, find the present value of each payment using our present value formula PV = FV/(1+r)T, using the monthly effective rate as r. Then add the ten present values to get the PV of the stream.