A financial company that advertises on television will pay you $53,000 now for annual payments of...

A financial company that advertises on television will pay you $53,000 now for annual payments of $8,000 that you are expected to receive for a legal settlement over the next 10 years. What is the present value of the annual payments if you estimate the time value of money at 9 percent? Round your PVA factor to 3 decimal places and final answer to the nearest whole dollar.

Expert Solution

P	Present value (to be solved)

n	No. of years = 10

r	rate of interest per annum = 9% or 0.09

	PMT = Payment every year = $ 8,000

	Note: Assumed that the first payment received at the end of year
	The formula for Present Value of Annuity is to be used

	P = PMT x [ ( 1 – [ (1 + r) ^ -n ] ) / r ]

	P = 8,000 * [ ( 1 - [ (1+0.09) ^ -10] )/0.09 ]

	P = 8,000 * [ ( 1 - [ (1.09) ^ -10] )/0.09 ]

	P = 8,000 * [ ( 1 - [ 0.4224 ] )/0.09 ]

	P = 8,000 * [ ( 0.5776 )/0.09 ]

	P = 8,000 * [ 6.418 ] ( PV annuity factor = 6.418 )

	P = 51,344

The present value of annuity payments amount to $ 51,344. Hence collecting $53,000 now instead of annual payments is beneficial at the 9% rate of return

jeff jeffy answered 3 years ago

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