Question

You wish to purchase a 15-year deferred annuity (payments start now) that will last 20 years and generate $3000 per month for those 20 years while growing in value at 3% during the 20-year payout period. Assuming the discount rate for all cash flows is 7%

What is the price you should pay for this 15-year deferred, 3% growing 20-year annuity? in creating your answer, place a spinner on all key rates (growth and discount)

Answer 1

	Present Value (PV)of Cash Flow=(Cash Flow)/((1+i)^N)
	i=Discount Rate=7%=0.07
	N=Year of Cash Flow
	Cash Flow at end of Year15=	$3,000
	Cash Flow at end of Year16=3000*1.03	$3,090
	Cash Flow at end of Year (N+1)=1.03*(Cash Flow in Year (N)
		N	CF	PV=CF/(1.07^N)
		Year End	Cash Flow	Present Value
		0		0
		1		0
		2		0
		3		0
		4		0
		5		0
		6		0
		7		0
		8		0
		9		0
		10		0
		11		0
		12		0
		13		0
		14		0
		15	$3,000	$1,087
		16	$3,090	$1,047
		17	$3,183	$1,008
		18	$3,278	$970
		19	$3,377	$934
		20	$3,478	$899
		21	$3,582	$865
		22	$3,690	$833
		23	$3,800	$802
		24	$3,914	$772
		25	$4,032	$743
		26	$4,153	$715
		27	$4,277	$688
		28	$4,406	$663
		29	$4,538	$638
		30	$4,674	$614
		31	$4,814	$591
		32	$4,959	$569
		33	$5,107	$548
		34	$5,261	$527
			SUM	$15,511
	Price you should pay for this 15-year deferred, 3% growing 20-year annuity	$15,511