Question

Dr. Oats, a nutrition professor, invests $75,000 in a piece of land that is expected to increase in value by 12 percent per year for the next five years. She will then take the proceeds and provide herself with a 10-year annuity. Assuming a 12 percent interest rate for the annuity, how much will this annuity be?

Answer 1

Cost of Land	75000
Annual appreciation	12%
Time	5	Years
Value after 5 years	=75000*(1+12%)^5
Value after 5 years	132,176
Now this will be converted into annuity @ 12% for 10 years and PV of all annuity payment should b eequal to 132,176
PV of annuity for making pthly payment
P = PMT x (((1-(1 + r) ^- n)) / i)
Where:
P = the present value of an annuity stream
PMT = the dollar amount of each annuity payment
r = the effective interest rate (also known as the discount rate)
i=nominal Interest rate
n = the number of periods in which payments will be made
PV of annuity payments=	Annual Payments * (((1-(1 + 12%) ^- 10)) / 12%)
132176=	Annual Payments * (((1-(1 + 12%) ^- 10)) / 12%)
132176=	Annual Payments * 5.65
Annual Payments=	132176/5.65
Annual Payments=	23,393.98