Question

An investment offers $6,800 per year, with the first payment occurring one year from now. The required return is 7 percent. a. What would the value be today if the payments occurred for 20 years

Answer 1

The Today's value of payment occurred for 20 years is $72,039.

Step-by-step explanation:

Payment of fixed amount for a fixed period of time is called annuity. Present value of annuity will be calculated as follow

PV of annuity = P x [ ( 1- ( 1 + r )^-n ) / r ]

According to given data

P = monthly payment = $6,800 every year

r = interest rate = 7%

n = number of period = 20 years = 20 periods

PV of annuity = $6,800 x [ ( 1- ( 1 + 0.07 )^-20 ) / 0.07 ]

PV of annuity = $72,039.30