Question 13 7 pts You are offered an investment that will pay you annual payment

Question

Question 13 7 pts You are offered an investment that will pay you annual payments of $50,000 for twenty years, beginning five years from now. If the market requires a return of 8%, compounded quarterly, what should be today's value of this investment? NOTE: Though it is NOT required, you have the option to submit your calculations to me via Canvas Email (within the same 60-minute time limit) for possible partial credit if/when applicable! B I - U E A - A - I N vs HTML Editora x x = = I I 11pt D D E O W

Explanation / Answer

Annual Interest rate = 8% compounded quarterly
Quarterly interest rate = 2%

Effective annual rate = (1 + Quarterly interest rate)^4 - 1
Effective annual rate = (1 + 0.02)^4 - 1
Effective annual rate = 1.02^4 - 1
Effective annual rate = 1.0824 - 1
Effective annual rate = 0.0824 or 8.24%

Annual payment starting from five years = $50,000

Present Value = $50,000/1.0824^6 + $50,000/1.0824^7 + $50,000/1.0824^8 + … + $50,000/1.0824^25
Present Value = [$60,000*(1 - (1/1.0824)^20)/0.0824] / 1.0824^5
Present Value = $578,714.82/1.0824^5
Present Value = $389,516.35

So, value of this investment is $389,516.35

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