Question

Peter Lynchpin wants to sell you an investment contract that pays equal $12,100 amounts at the end of each of the next 21 years. If you require an effective annual return of 8 percent on this investment, how much will you pay for the contract today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Present Value= $121,203.32

Step-by-step explanation:

Giving the following information:

Peter Lynchpin wants to sell you an investment contract that pays equal $12,100 amounts at the end of each of the next 21 years.

Rate of return= 8%

To calculate the present value, first, we need to determine the future value using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual pay= 12,100

n= 21

i= 0.08

FV= {12,100*[(1.08^21)-1]} / 0.08

FV= $610,117.35

Now, we can determine the present value, therefore, the amount is worth today.

PV= FV/(1+i)^n

PV= 610,117.35/ 1.08^21= $121,203.32