In: Finance
Calculate the annual cash flows of a $100,000, 10-year fixed-payment deferred annuity earning a guaranteed 3.6 percent per year if annual payments are to begin at the end of year 4 (beginning of year 5). (Hint: Grow the original investment for 4 years and then all payments are paid at the beginning of the year.)
Compute the value of annuity after three years from now, using the equation as shown below:
Value of annuity = Present value*(1+Rate)Time
= $100,000*(1 +0.036)3
= $100,000*1.111934656
= $111,193.4656
Hence, the value of annuity after three years from now is $111,193.4656.
Compute the present value annuity factor, using the equation as shown below:
PVIFA = {1 – (1 + Rate)-Number of periods}/ Rate
= {1 – (1 + 0.036)-10}/ 3.6%
= 8.27484404349
Hence, the present value annuity factor is 8.27484404349.
Compute the annual cash flows, using the equation as shown below:
Annual cash flows = Value of annuity/ Present value annuity factor
= $111,193.4656/ 8.27484404349
= $13,437.5300628
Hence, the annual cash flows are $13,437.5300628.