Question

You are considering investment that is going to pay $1,500 a month starting 20 years from today for 15 years. If you can earn 8 percent return on any investment, compounded monthly, how much at most are you willing to pay for this investment opportunity?

Answer 1

Monthly payment = $1,500
Annual interest rate = 8%
Monthly interest rate = 0.667%
Number of payments = 15 * 12 = 180

Payments will start after 20 years or 240 months

Present value of annuity = $1,500/1.00667^181 + $1,500/1.00667^181 + .... + $1,500/1.00667^420
Present value of annuity = $1,500 * (1/1.00667)^180 * (1 - (1/1.00667)^240) / 0.00667
Present value of annuity = $1,500 * 36.120453
Present value of annuity = $54,180.68

You should pay maximum $54,180.68 for this investment opportunity.