Question

15-

For the following annuity, calculate the annual cash flow.

PV:73000

Years:24

Interest Rate:9%

Annual Cash Flow:

16- If you make a deposit of the amount below at the end of each year for the number of years at the interest rate specified, how much money will you have in the account at the end of that time?(Do not round intermediate calculations, round answer to two decimal places, i.e. 32.16)

Payment:23000

Years:19

Interest Rate:9%

Annual Cash Flow:

17-  Curly's Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $20,000 per year forever. If the required return on this investment is 6 percent, how much will you pay for the policy? (Round your answer to nearest whole number, i.e. 32)

Answer 1

15]

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

where P = periodic payment. We need to calculate this.

r = interest rate per period. This is 9%.

n = number of periods. This is 24.

$73,000 = P * [1 - (1 + 9%)^-24] / 9%

P = $73,000 * 9% / [1 - (1 + 9%)^-24]

P = $7,520.65

annual cash flow = $7,520.65

16]

Future value of annuity = P * [(1 + r)ⁿ - 1] / r,

where P = periodic payment. This is $23,000

r = periodic rate of interest. This is 9%

n = number of periods. This is 19

Future value of annuity = $23,000 * [(1 + 9%)¹⁹ - 1] / 9%

Future value of annuit   = $1,058,424.54

17]

PV of perpetuity = perpetual payment / interest rate

PV of perpetuity = $20,000 / 6%

PV of perpetuity = $333,333.33