Question

You have received an inheritance which will pay you $3,858 every month for 22 years. If the relevant rate is 9.06% per year. How much is it worth today?

Answer 1

The amount is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r will be as follows:

= 9.06% / 12 (Since the payments are on monthly basis, hence divided by 12)

= 0.755% or 0.00755

n will be as follows:

= 22 year x 12 months (Since the payments are on monthly basis, hence multiplied by 12)

= 264

Therefore, the amount is computed as follows:

= $ 3,858 x [ (1 - 1 / (1 + 0.00755)²⁶⁴ ) / 0.00755 ]

= $ 3,858 x 114.2671985

= $ 440,842.85 Approximately