Question

Will buys a 10 year annuity where payments increase each year by exactly 10%. (Assume the payments are at the end of each year.) Determine the cost of the annuity if the first payment is $3000 and the interest rate is:

(a)j1=3.5%

Answer: $

(b)j1=10.3%

Answer 1

The Cost of Annuity can be determined using PV function in Excel.

a) In this part, the following information is given:

Initial Cash Flow = $3,000

Growth Rate = 10%

Years = 10 years

The Cash Flow would be

Period	Cash Flow
0	3,000
1	3,300
2	3,630
3	3,993
4	4392
5	4831
6	5314
7	5,845
8	6429
9	7071
10	7778

a) Interest Rate = 3.5%

=PV(((1+Discount rate)/(1+Growth Rate)-1,Number of years,-Growth Rate, 0, 1)

= $13,355.53

b) interest rate = 10.3%

=PV(((1+Discount rate)/(1+Growth Rate)-1,Number of years,-Growth Rate, 0, 1)

=$9878.49

**In the above syntax, instead of writing you have to select respective cell in excel spreadsheet.