You will have to make 15 annual payments of $7.5 million each with the first payment...

You will have to make 15 annual payments of $7.5 million each with the first payment in eight years. If you can earn 6.5% interest, how much must you deposit today to cover your obligation?

Expert Solution

Step-1:Calculating present value of annual payments seven years from now

Present value		=	Annual payments * present value of annuity of 1
		=	$ 7.50	*	9.402669
		=	$ 70.52	million

Working:

Present value of annuity of 1			=	(1-(1+i)^-n)/i			Where,
			=	(1-(1+0.065)^-15)/0.065			i	6.50%
			=	9.402669			n	15

Step-2:Calculation of present value of amount now

Present value			=	Present value calculated above 7 years from now*Present value of 1
			=	$ 70.52	*	(1.065^-7)
			=	$ 70.52	*	0.643506
			=	$ 45.38	million


Thus,
	Amount to be deposited today			$ 45.38	million

jeff jeffy answered 1 year ago

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