Question

On 12-31-19, Austin entered into an agreement that required Austin to pay a vendor $50 every year on 12-31 until 2064. The agreement required Austin to make the first annual payment on 12-31-20. Assume the market rate of interest for Austin is 3%. As of 12-31-19 what was the present value of Austin’s obligation?

Answer 1

	As of 12-31-19, the present value of Austin’s obligation		$       1,225.94
Working;
	Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
		=	(1-(1+0.03)^-45)/0.03		i	=	3%
		=	24.51871254		n	=	45	(2064-2019)
	Present value of annuity	=	Annual Cash flow	*	Present value of annuity of 1
		=	$                   50	*	24.51871
		=	$             1,226