Question

Salim has an investment worth $300,000. The investment will make a special payment of X to Salim in 2 years from today. The investment also will make regular, fixed annual payments of $65,000 to Salim with the first of these payments made to Salim in 1 year from today and the last of these annual payments made to Salim in 6 years from today. The expected return for the investment is 10 percent per year. What is X, the amount of the special payment that will be made to Salim in 2 years?

Answer 1

Answer: $‭20,455.66

Step-by-step explanation:

These are fixed payments per year so it is an annuity.

The present value annuity factor for a discount rate of 10% and 6 years duration is 4.3553.

The present value of the investment is therefore;

= 65,000 * 4.3553

= $283,094.5‬0

The special payment in 2 years from today will be;

Special payment = future value of difference between investment amount and investment present value

= (300,000 - 283,094.5‬0) * ( 1 + 10%)^2

= $‭20,455.66