Question

Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $24,000 per year and is designed to last 7 years. If the interest rate for this problem calculation is 11 percent, what is the most he should have paid for the annuity? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Maximum Payment =

Answer 1

Annuity value	24,000
Time	7
Interest	11%
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 at t2	=Annual payment x (((1-(1 + r) ^- n)) / i)
PV of annuity at t2	24000 * (((1-(1 + 11%) ^- 7)) / 11%)
PV of annuity at t2	113,093
PV of annuity at t0	=113093/(1+11%)^2
PV of annuity at t0	91,788.82