Question

You have decided to buy a cabin on the kennebec River to run as a fishing camp when you reture. The owner has offered to allow you to pay for the cabin in 10 annual payments of$11000 begining 12 years from today.If the interest rate is 4% EAR,what is the value today of the purchase price of your cabin?(round to nearest dpllat)

Answer 1

- Calculating the Present Value of annual payments at begining of 12 years from today using the formula:-

PresentValue = C* [1 – (1 + r)"] *(1+r) 7

Where, C= Periodic Annual Payments=$11,000

r = Periodic Interest rate = 4%

n= no of periods = 10

$Present Value= 11,000*\frac{[1-(1+0.04)^{-10}]}{0.04}*(1+0.04)$

(1 – 0.67556416882] PresentValue = 11,000 * 0.04 * (1.04)

Present Value = $92,788.65

Now, Calculating the Present value today from begining of 12 years using Formula:-

Present Value today = PV12/(1+r)^12

=$92,788.65/(1+0.04)^12

= $57955.52

So, the value today of the purchase price of your cabin is $57,956