Question

Peter Lynchpin wants to sell you an investment contract that pays equal $13,800 amounts at the end of each year for the next 16 years. If you require an effective annual return of 7 percent on this investment, how much will you pay for the contract today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

= $130,363.75

Explanation:

Given data:

total cost of contract at each year = $13800

time for contract,  n 16 year

annual rate if return,  i 7%

Present Value ordinary annuity PVOA

$PVOA = PMT \frac{1 - \frac{1}{(1 + i)^n}}{ i}$

$= 13,800[\frac{(1 - \frac{1}{1.07^{16}})}{0.07}]$

$=13,800[\frac{(1 - 0.33873)}{0.07}]$

$=13,800[9.44665]$

= $130,363.75