An investment offers $5,800 per year, with the first payment occurring one year
ID: 2810596 • Letter: A
Question
An investment offers $5,800 per year, with the first payment occurring one year from now. The required return is 7 percent. a. What would the value be today if the payments occurred for 20 years? (Do not b. What would the value be today if the payments occurred for 45 years? (Do not c. What would the value be today if the payments occurred for 70 years? (Do not d. What would the value be today if the payments occurred forever? (Do not round round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) round intermediate calculations and round your answer to 2 decimal places, e.g., 3216.) intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Present value of 20 annual payments b. Present value of 45 annual payments c. Present value of 70 annual payments d. Present value of annual payments foreverExplanation / Answer
Answer to Question 1:
Answer a.
Annual Payment = $5,800
Interest Rate = 7%
Period = 20 years
Present Value = $5,800 * PVIFA(7%, 20)
Present Value = $5,800 * (1 - (1/1.07)^20) / 0.07
Present Value = $5,800 * 10.59401
Present Value = $61,445.26
Answer b.
Annual Payment = $5,800
Interest Rate = 7%
Period = 45 years
Present Value = $5,800 * PVIFA(7%, 45)
Present Value = $5,800 * (1 - (1/1.07)^45) / 0.07
Present Value = $5,800 * 13.60552
Present Value = $78,912.02
Answer c.
Annual Payment = $5,800
Interest Rate = 7%
Period = 70 years
Present Value = $5,800 * PVIFA(7%, 70)
Present Value = $5,800 * (1 - (1/1.07)^70) / 0.07
Present Value = $5,800 * 14.16039
Present Value = $82,130.26
Answer d.
Annual Payment = $5,800
Interest Rate = 7%
Period = Forever
Present Value = $5,800 / Interest Rate
Present Value = $5,800 / 0.07
Present Value = $82,857.14
Answer to Question 2:
Annual Payment = $26,000
Interest Rate = 5.30%
Present Value = Annual Payment / Interest Rate
Present Value = $26,000 / 0.053
Present Value = $490,566.04
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