Question

Pet need to pay his medical expenses. The current bill is 5000. Every year in the...

Pet need to pay his medical expenses. The current bill is 5000. Every year in the future the expense will increase by 7%. He will pay it for 52 years. Assume that the governing annual effective interest rate is 5%.

A) What kind of annuity is in question?

B)If he want to pay a single payment of all fee, how much should he pay?

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Answer #1

a.

Annuity is defined as series of similar cash flow for specified limited period. There are two types of annuity, Ordinary annuity and annuity due. In the ordinary annuity payment is made at the end of the period and in the annuity due payment is made at the beginning of the year.

He pays medical bill at end of each year for next 52 year. So, this type of annuity is called Ordinary annuity.

b.

single payment of all fee, is present value of annuity discounted at 7%. So, ,present value of annuity is calculated in excel and screen shot provided below:

Present value of annuity that is single payment of all fee is $69,310.62.

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