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16 November, 09:18

Peter Lynchpin wants to sell you an investment contract that pays equal $12,100 amounts at the end of each of the next 21 years. If you require an effective annual return of 8 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.)

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  1. 16 November, 09:35
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    Present Value = $121,203.32

    Explanation:

    Giving the following information:

    Peter Lynchpin wants to sell you an investment contract that pays equal $12,100 amounts at the end of each of the next 21 years.

    Rate of return = 8%

    To calculate the present value, first, we need to determine the future value using the following formula:

    FV = {A*[ (1+i) ^n-1]}/i

    A = annual pay = 12,100

    n = 21

    i = 0.08

    FV = {12,100*[ (1.08^21) - 1]} / 0.08

    FV = $610,117.35

    Now, we can determine the present value, therefore, the amount is worth today.

    PV = FV / (1+i) ^n

    PV = 610,117.35 / 1.08^21 = $121,203.32
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