Question

What would you pay for an investment that pays you $25500 at the end of each year for the next twenty years? Assume that the relevant interest rate for this type of investment is 8%.

Answer 1

Annual return from investment = $25,500

Interest rate (i) = 8%

Time period (n) = 20 year

Amount to be invested = ?

Amount to be invested = Annual return from investment x Present value annuity factor (i%, n)

= 25,500 x Present value annuity factor (8%, 20)

= 25,500 x 9.81815

= $250,363 (Rounded to whole dollar)

Hence, amount to be paid for investment = $250,363

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