Question

Ken acquired his sister’s share of their business by agreeing to make payments of $4000 at the end of each year for 12 years. If the payments are deferred for 3 years and money is worth 5% compounded quarterly, what is the cash value of his sister’s share of the business?

Answer 1

To find the cash value of Ken's sister's share of the business, we need to calculate the present value of the future payments using the formula for the present value of an annuity.

Step-by-step explanation:

To find the cash value of Ken's sister's share of the business, we need to calculate the present value of the future payments using the formula for the present value of an annuity.

The formula for the present value of an annuity is:

PV = PMT * (1 - (1 + r)^(-n)) / r

Where:

• PV is the present value
• PMT is the payment amount
• r is the interest rate per period
• n is the number of periods

In this case, the payment amount is $4000, the interest rate is 5% compounded quarterly, and the number of periods is 12 years minus 3 years, which is 9 years.

Using these values, we can calculate the present value of the annuity to find the cash value of Ken's sister's share of the business.