Question

Present Value of an AnnuityConsider the following scenarios for an annuity with a $1000 payment amount C: 27.If you invest the $1,000 at the end of each year for five years and receive a return of 7%,how much is the annuity worth in today's dollars? 28.Now consider what happens if we increase the number of years of the annuity, from 5 to 6 years:Before calculating, predict whether the present value of the annuity will rise or fall by more or less than $1000? Describe in a few sentences why this is the case.Calculate how much is the annuity worth in today’s dollars to confirm your prediction.29.Now (going back to the original case in a) consider what happens if we increase the rate of return, from 7% to 8%:Before calculating, predict if the present value of the annuity will rise or fall from your answer in a? Describe in a few sentences why this is the case.Calculate how much is the annuity worth in today’s dollars to confirm your prediction

Answer 1

The annuity is worth $4100.20 today and if we increase the rate of return, from 7% to 8% the value of the annuity falls to $3992.71.

Step-by-step explanation:

The step by step solution for the given problem is attached with the image.

The value of annuity will decrease if we increase the rate of return, from 7% to 8%. Future cash flows are discounted using the rate of return, and the higher the discount rate, the lower the present value of the future cash flows.