EXERCISE 12A–5 Basic Present Value Concepts [LO5]

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr. Ormsby has won the week’s grand prize totaling $1.6 million. The State Lottery Commission has indicated that Mr. Ormsby will receive his prize in 20 annual installments of $80,000 each.

Required:

1. If Mr. Ormsby can invest money at a 12% rate of return, what is the present value of his winnings?

2. Is it correct to say that Mr. Ormsby is the “state’s newest millionaire”? Explain your answer.