You receive $500 today and every month for the next 20 years. You will receive this...

You receive $500 today and every month for the next 20 years. You will receive this payment at the beginning of the month. Assume you can earn 5% on this annuity. How much is it worth?

Expert Solution

Given:

Monthly cash flow (PMT)=$500

Time period (t)= 20 years*12= 240 months

Interest rate(r )= 5%/12=0.4167%

The question is concerning finding the future value of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

It is computed by using the formula below:

Future Value= PMT [(1+r)^t-1/r]

This can also be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^nd BGN 2^nd SET on the Texas BA II Plus calculator.

The question can also be solved using a financial calculator by inputting the below into the calculatornow:

PMT=$500; N= 240; I/Y=0.4167%

Then press the FV button to get the future value.

The answer is $206.382.75.

I hope that was helpful :)

jeff jeffy answered 2 years ago

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