Question

Clancy made an investment recently. The investment has promised it will begin making payments to him of $1627, increasing the payment by 14% each subsequent year. The payments will not begin, however, until the end of year 8. Clancy will receive the payments for 12 years.

Today, Clancy received an offer from another investor who wanted to buy the rights to the future payments. Clancy has asked you to calculate how much those future payments are worth today so he can negotiate a fair deal. Assume the payments would be deposited into a bank account that pays a nominal annual rate of 3%, compounded bi-annually (twice a year).  

Note: Clancy will receive the first payment at the end of year 8

Answer 1

Thus, the value of the payments is $29,897.5976 to Clancy.

Note:

• we have assumed that the inflation rate for the entire period is 0%
• The deposits are considered advance payments and the value is calculated at time 8.
• The discounting factor for the deposits = 1/1.0609
• The time value of money is ignored for the first 8 years.
• If the interest rate for the first 8 years are given to be i, the present value will be 29897.5976 (1/(1+i))^8. Where 1/(1+i) is the discounting factor.