Question

Your grandparents bought you an annuity that will pay you $20,000 a year for 20 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 6.5 percent?

Answer 1

To find the value of the annuity today, calculate the present value of the future cash flows using the formula: Present Value = Cash Flow / (1 + Discount Rate) ^ Time.

Step-by-step explanation:

To find the value of the annuity today, we need to calculate the present value of the future cash flows.

Using the formula for the present value of an annuity, we can calculate:

Present Value = Cash Flow / (1 + Discount Rate) ^ Time

In this case, the cash flow is $20,000, the discount rate is 6.5%, and the time is 20 years.

Plugging in these values, we get:

Present Value = 20000 / (1 + 0.065) ^ 20

Solving this equation gives the present value of the annuity, which is approximately $200,085.96.