Question

Suppose you bought a 25-year annuity of $8,500 per year at the current discount rate of 9 percent per year. a. What is the value of your annuity today

Answer 1

The annuity is worth $83,419.93.-

Step-by-step explanation:

Giving the following information:

Suppose you bought a 25-year annuity of $8,500 per year at the current discount rate of 9 percent per year.

First, we need to calculate future value. We will use the following formula:

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

A= cash flow

FV= {8,500*[(1.09^25) - 1]} / 0.09

FV= $719,957.62

Now, the present value:

PV=FV/(1+i)^n

PV= 719,957.62/(1.09^25)

PV= $83,419.93