You are offered a 18-year annuity of $10,000 annual payments. However, the annuity begins in 7...

You are offered a 18-year annuity of $10,000 annual payments.

However, the annuity begins in 7 years (you will not receive any payments for 7 years, but will then receive $10,000 at the end of each year for 18 years. If the discount rate is 6% per year (compounded annually), what is the current value of the annuity?

Expert Solution

- You are offered a 18-year annuity of $10,000 annual payments.

You will not receive annuity in first 7 years which means that the annuity will start from year 8 and continued till next 18 years.

To Calculate its Value today first we will compute the Present Value at the end of year 7 of annual payments and then discount it back to Present value today.

Where, C= Periodic Payments = $10,000

r = Periodic Interest rate = 6%

n= no of periods of annuity = 18

m = no of discounting periods = 7

Present Value = $72,009.75

So, the he current value of the annuity is $72,009.75

jeff jeffy answered 2 years ago

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