Question

Problem 7-20

You are offered an annuity that will pay $10,000 a year for ten years (that is, ten payments), but the payments start after four years have elapsed. If you want to earn 9 percent on your funds, what is the maximum you should pay for this annuity? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.

Answer 1

Calculate the present value as follows:

Present value = Amount * ((1-(1+rate)^-periods)/Rate

Present value = $10,000 *(1-(1+9%)^-10)/9%

Present value = $64,176.577012

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Maximum amount = Present value /(1+rate)^year

Maximum amount = $64,176.577012 / (1+9%)^4

Maximum amount = $45,464.31