Question

How much would you have to invest today in the bank at an interest rate of 8% to have an annuity of 7,000 per year for 8 years, with nothing left in the bank at the end of the 8 years? Select the amount below that is closest to your answer. Ignore income taxes) Use the selections from the present value tables below! Present Value of $1 Period % 8\% 4 0.855 0.681 8 0.540 16 0534 0.292 Present Value of an Annuity of $1 Period % 3.630 3.312 6.733 5.747 11.652 8.851 All answers are rounded to the nearest . A $ 3,780 B. $ 2,044 40,229

Answer 1

Given in the question,

Interest rate = 8%

Annuity per year for 8 years = $7000

Present Value of an Annuity of $1 for 8 years = 5.747

Since the cash inflow required per year is constant we can use Present Value of an Annuity of $1 for 8 years.

The formula to calculate in this case is Present Value(PV) = Annuity required per year * Present Value of an Annuity of $1 for 8 years

=$7000*5.747

=$40229

So an amount of $40229 is required to be invested in bank today at 8% interest rate to receive annuity of $7000 for 8 years