Question

You are offered an annuity that will pay you $200,000 once per year, at the end of the year, for 25 years. The first payment will arrive one year from now. The last payment will arrive twenty-five years from now. Suppose your annual discount rate is i=17.25%, how much are you willing to pay for this annuity? (hint: this is the same as the present value of an annuity.) 11. An investment gives you a 18.35% nominal return over 1 year. There was 2.5% inflation over that year. What was your exact real return? (Don’t use the Fisher Equation.)

Answer 1

A) I will pay upto $1,137,722.30

B) real rate 16.15%

Step-by-step explanation:

A)

We will calcualte the present value of an annuity of 200,000 during 25 years at 17.25 discount rate:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 200,000

time 25

rate 0.1725

`200000 * (1-(1+0.1725)^(-25) )/(0.1725) = PV\\`

PV $1,137,722.2945

B)

if we don't have to use fisher equation then we simply do nominal - rate:

18.35% - 2.5% = 16.15%

18.35 - 2.5 =