Question

An investment pays you $50,000 at the end of each of the next 20 years. The investment also pays you $1,000 at the end of each month over the same 20 year period. Assuming a discount rate of 10%, how much should you pay for this investment?

Group of answer choices

$529,303

$464,292

$610,462

$567,572

$495,048

Answer 1

1. 50,000 at the end of each of the next 20 years

Present Value of Annuity = Periodic Payment*[{1-(1+i)^(-n)} / i]

= 50,000*[{1-(1+10% )^(-20)} /10%]

= 425,678.186

2. $1,000 at the end of each month over the same 20 year period

Present Value of Annuity = Periodic Payment*[{1-(1+i)^(-n)} / i]

=1,000*[{1-(1+10%/12)^(-20*12)} /(10%/12)]

= 103,624.6187

Hence, Total amount to be paid today = $ 425,678.186+103,624.6187

= $ 529,302.80

= $ 529,303

Answer = $ 529,303