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Reinvest all payments in an account earning

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Problem: Jack and Diane are lottery winners! The prize is 20 consecutive annual payments of $50,000 beginning one year from today. For part a and b, draw the timeline, identify the five elements of the time value of money, and solve the question using a calculator.

a) Jack looks at Diane and says "can you believe it, us as millionaires today". Are they? Use an interest rate of 5%. (Find Present Value)

b) Jack and Diane decide to wait until the end of year 20 to spend the money, preferring to reinvest all payments in an account earning 5%. How much will they have at the end of year 20?

c) As a bonus, the fifth payment and only the fifth payment includes an extra $25,000 so that the amount received at the end of year 5 is $75,000. Jack looks at Diane and says "can you believe it; us, millionaires after 20 years." Are they? Use an interest rate of 2%. Draw the timeline and use calculator for this question.

Reference no: EM132460613

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