David decided to invest an amount of money in a bank that pays 20.00% nominal interest, compounded monthly, to provide him with an annuity of $10,800 (per year) for 6 years, starting 12 years from now. If the interest rate remains constant over this entire period. What amount should he invest?
Annuity = $10,800
Time = 6 years after 12 years from now
Interest rate = 20%
Let the amount that should be invested be $x
Present Value = Annuity*PVAF(r%,n)
x = 10,800*PVAF(20%,6)*PVF(20%,12)
(PVF is used to discount the value to today otherwise we will get the present value at 12th year from now)
x = $10,800*[(1-1.2-6)/0.2]*1.2-12
x = 10,800*3.3255*0.1121
x = $4,028
Amount to be invested now = $4,028
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