Question

Mary buys an annuity that promises to pay her $1,500 at the end of each of the next 20 years. The appropriate interest rate is 7.5%. What is the value of this 20-year annuity today?

Answer 1

Answer:

PV= $15,291.74

Explanation:

Giving the following information:

Annual cash flow= $1,5000

Number of years= 20

Interest rate= 7.5%

To calculate the present value, first, we need to determine the future value using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual cash flow

FV= {1,500*[(1.075^20) - 1]} / 0.075

FV= $64,957.02

Now, we can calculate the present value:

PV= FV/(1+i)^n

PV= 64,957.02/(1.075^20)

PV= $15,291.74