iNCLUDE TABLE PLEASE AND ALL FORMULAS USED. His recently departed dear Aunt Anni
ID: 2383351 • Letter: I
Question
iNCLUDE TABLE PLEASE AND ALL FORMULAS USED.
His recently departed dear Aunt Annie, may she rest in peace, has left Tom a 6-year annuity paying $4,500 per year. He will receive the first payment 4 years from today. If he is discounting at 7% (EAR), what is the present value of his inheritance?
***** I know that for the first 4 years he will not be receiving anything. His payments will start during the 5th year.
5 ------ 4500/(1.07)^5?
6 -------- 4500/(1.07)^6
7
8
9
10
this is the total of the 6 annuity payments, is this correct?
Explanation / Answer
present value of annuity at the end of year 4 = PVAF@7%,6years *cash flow
= 4.76654 *4500
= $ 21,449.43
so present vlaue of annuity today = PVF@7%,4year * present value of annuity at year4
= .76290 * 21449.43
= $ 16,363.77
**Assuming that he will receive his first annuity at the end of year 5.
**your way is also correct but after summing up,calculate the present value of sum today.
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