Question

15. Martha has been offered an injury settlement of $17,000 a year for nine years. She wants to know what it is worth to her in year six dollars as she wants to sell the remaining annuity to an investor at that time. Her opportunity cost of this investment is 4.8%.

Answer 1

Total payments are nine. After six years only three annual payments of $17,000 are due. Present value of annual payments of $17,000 for three years is:

a	Present value of annuity=	P* [ [1- (1+r)-n ]/r ]
P=	Periodic payment	17,000
r=	Rate of interest per period
	Annual interest	4.80%
	Number of interest payments per year	1
	Interest rate per period	0.048/1=
	Interest rate per period	4.800%
n=	number of periods:
	Number of years	3
	Periods per year	1
	number of periods	3
	Present value of annuity=	17000* [ (1- (1+0.048)^-3)/0.048 ]
	Present value of annuity=	46,469.26

Value of annuity in year six dollars at that time is $46,469.26