Determine the amount of money that must be invested now (time 0) at 7% nominal interest,...
Determine the amount of money that must be invested now (time 0) at 7% nominal interest, compounded monthly, to provide an annuity of $5,000 per year for 12 years, starting eight years from now. The interest rate remains constant over this entire period of time.
The amount of money that must be invested now is $
Homework Answers
First we need to calculate the effective rate of interest.
Effective rate of interest=i=(1+7%/12)^12-1=7.2290%
Amount of investment should be equal to PV of future cash inflows i.e.
Amount of investment now=5000*(P/A,0.072290,12)*(P/F,0.072290,8)
Let us calculate the interest factors
(P/F,0.072290,8)=1/(1+0.072290)^7=0.61349949
Amount of investment now=5000*7.84664826*0.61349949=$24069.57
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