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sweet-ann [11.9K]
3 years ago
13

Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she p

ay for this investment if she wishes to earn a 12 percent rate of return?
Business
1 answer:
KATRIN_1 [288]3 years ago
3 0

Answer:

She should pay $22,819 for this investment.

Explanation:

A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

Formula for Present value of annuity is as follow

PV of annuity = P x [ ( 1- ( 1+ r )^-n ) / r ]

Where P = Annual payment = $5,000

r = rate of return = 12%

n = number of years = 7 years

PV of annuity = $5,000 x [ ( 1- ( 1+ 0.12 )^-7 ) / 0.12 ]

PV of Annuity = $22,818.78

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