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18 March, 17:34

How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the first payment 1 year from today, at an interest rate of 12%?

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  1. 18 March, 21:23
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    The amount to be invested today is $3604.78

    Explanation:

    This is a case of an ordinary annuity, to calculate the present value, the below formula is made used of:

    PV=A * (1-1 / (1+r) ^N) / r

    A is the annuity payment of $1000 for 5 years

    r is the rate of return on the annuity of 12%

    N is the duration of the annuity payment, that is 5years

    PV=$1000 * (1-1 / (1+12%) ^5) / 12%

    PV=$3604.78

    In essence, in order to receive $1000 every year starting a year today for 5 years, the sum of $3604.78 must be deposited today at rate of return of 12% per year.

    The amount required would be been different if the first payment of $1000 is due today
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