Question

What is the current economic value of an inheritance that will pay $3500 to the beneficiary at the beginning of every three months for 20 years starting when the beneficiary reaches 21 years of age, 4 1/4 years from now? Assume that money can earn 7% compounded monthly. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

  Current economic value$

Answer 1

Rate = 7% , Monthly Interst rate = 7%/12 = 0.583% Effective annual rate = (1+Monthly Interest rate)^12-1 = (1+0.00583)^12 - 1 = 7.22% Quarterly Interest rate = (1+0.0722)^1/4-1 = 1.7581% Quarterly Payment = $3500 No of payments = 80 (20*4) PMT = 3500 ; Annual Nominated rate = 7.22% ; 3m effective rate = 1.7581% EV of inheritance at the beginning of payments ==PV(1.7581%,80,-3500,1) = $152335.70 Discount the same to today Annual effective rate = (1+0.0722/12)^12-1 = 7.46% Time in years = 4.25 PV today = 152335.70/(1+0.0746)^4.25 = 112202.5271

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