An investment, called a "deferred annuity" promises annual payments of $10,000, with the first payment occurring seven years from today. Your required rate of return is eight percent. What is the most that you would pay for this investment today?

Question

Gabriella Franklin

Business

1 May, 17:15

An investment, called a "deferred annuity" promises annual payments of $10,000, with the first payment occurring seven years from today. Your required rate of return is eight percent. What is the most that you would pay for this investment today?

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Answers (1)

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Guadalupe Villarreal · Answer 1

Today the investment is valued at $72,936.30

Explanation:

Giving the following information:

An investment promises annual payments of $10,000, with the first payment occurring seven years from today. Your required rate of return is eight percent.

We need to make two calculations. First, calculate the value of the perpetual annuity. Then find the present value today.

We need to use the following formula:

PV = Cf/i = 10,000/0.08 = 125,000

Now, we can calculate the present value today:

PV = FV / (1+i) ^n

PV = 125,000 / 1.08^7 = $72,936.30

Today the investment is valued at $72,936.30