We use the formula PV = FV (1/1+R)^N to calculate Present Value.

The formula is used to figure out how much a future sum is worth today, given that there is always a discount rate.

In class, we imagined a $20 million lottery win, in which the Lottery officials make the following offer: either take $1 million per year for 20 years, or accept the Present Value using a discount rate of 5%.

There is a factor that is NOT in the Present Value formula. What is it?

		A) Risk. Even if one can easily calculate the Present Value because we already know the Future Value and the Discount Rate, one still has to assess risk -- either the risk that the income stream will stop, or the risk that the discount rate is wrong, or that one will have too high an opportunity cost by waiting for the term (or by not waiting for the term).
		B) Inflation.
		C) War, social disruption, government collapse, all of which could change Future Value.
		D) War, social disruption, government collapse, any of which could change Term of Years.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Risk is a crucial factor not incorporat... View the full answer