Question

Your brother has offered to give you $185 starting next year, and after that growing at 2.7% per year for the next 20 years. You would like to calculate the value of this offer by calculating how much money you would need to deposit in a local bank so that the amount will generate the same cash flows as he is offering you. Your local bank will guarantee a 6.2% annual interest rate so long as you have money in the account.

round answer to the nearest cent

Answer 1

First of all, find the value of all the cash flow at the end of year 20

Now, you want to replicate this amount by depositing today. So this is your future value.

Future value = 5137.27

Time = 20 years

Rate = 6.2%

Present value = 0

We want to see the present value of that

So

Present value = Future value / ( 1 +rate)^time

Present value = 5137.27 / (1.062)^20

Present value = 1542.56

Let me know if you have any doubts