A local magazine is offering a $2,500 grand prize to one lucky winner. $1,000 will be paid on the day of the drawing. the remaining $1,500 will be paid in three annual payments of $500 each, starting one year after the drawing. how much would this prize be worth to you if you can earn 9 percent on your money?
This problem considers simple interest formula. It is: [tex]A=I*( 1+ \frac{r}{100} )^{n} [/tex] Where A= total amount after some time I = initial amount r = rate n = number of years
Total prize we will receive is: Total = $1000 + $500 after one year + $500 after two years + $500 after three years.
Now we need to calculate how much we will earn after each year: Year 1: [tex]A=500* (1+ \frac{9}{100})^{1} = 545[/tex] Year 2: [tex]A=500* (1+ \frac{9}{100})^{2} = 594,05[/tex] Year 3: [tex]A=500* (1+ \frac{9}{100})^{3} = 647,51[/tex]
So total amount is: Total = $10000 + $545 + $594,05 + $647,51 Total = $2786,56
