you are offered an annuity that will pay you $200,000 once per year, at the end...

you are offered an annuity that will pay you $200,000 once per year, at the end of the year, for 25 years. the first payment will arrive one year from now. the last payment will arrive twenty five years from now. suppose your annual discount rate i=17.25%, how much are you willing to pay for this annuity? ( this is the same as the present value of an annuity)

Solutions

Expert Solution

Present Value Of An Annuity

= C*[1-(1+i)^-n]/i]

Where,

C= Cash Flow per period

i = interest rate per period

n=number of period

= $200000[ 1-(1+0.1725)^-25 /0.1725]

= $200000[ 1-(1.1725)^-25 /0.1725]

= $200000[ (0.9813) ] /0.1725

= $11,37,722.29

jeff jeffy answered 2 years ago

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