Peter Lynchpin wants to sell you an investment contract that pays equal $22,500 amounts at the end of each of the next 20 years.

Question

3 years ago

15

Peter Lynchpin wants to sell you an investment contract that pays equal $22,500 amounts at the end of each of the next 20 years.

If you require an effective annual return of 8 percent on this investment, how much will you pay for the contract today?

Business

1 answer:

Effectus [21] · Answer 1 · 2022-04-18T22:04:33+03:00

Answer:

The amount to be paid for the contract today = $220,908.32

Explanation:

<em>The amount to be paid for the contract today will be equal to the present value of the annuity of $22,500 payable for 20 years discounted at a rate of 8% per annum.</em>

Present Value = A ×( 1 - (1+r)^(-n))/r

A- 22,500, r- rate of return - 8%, n -no of years 20 years

PV = 22,500 ×( 1-(1.08)^(-20) )/ 0.08

PV = 22,500 ×9.8181

PV = $220,908.32

The amount to be paid for the contract today = $220,908.32