Peter Lynchpin wants to sell you an investment contract that pays equal $22,500 amounts at the end of each of the next 20 years. If you require an effective annual return of 8 percent on this investment, how much will you pay for the contract today?

Question

Business

Litzy Fleming

4 April, 20:23

Peter Lynchpin wants to sell you an investment contract that pays equal $22,500 amounts at the end of each of the next 20 years. If you require an effective annual return of 8 percent on this investment, how much will you pay for the contract today?

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Answers (1)

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Brett Kirk · Answer 1

The amount to be paid for the contract today = $220,908.32

Explanation:

The amount to be paid for the contract today will be equal to the present value of the annuity of $22,500 payable for 20 years discounted at a rate of 8% per annum.

Present Value = A * (1 - (1+r) ^ (-n)) / r

A - 22,500, r - rate of return - 8%, n - no of years 20 years

PV = 22,500 * (1 - (1.08) ^ (-20)) / 0.08

PV = 22,500 * 9.8181

PV = $220,908.32

The amount to be paid for the contract today = $220,908.32