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17 November, 22:16

Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she pay for this investment if she wishes to earn a 12 percent rate of return?

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  1. 18 November, 00:41
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    She should pay $22,819 for this investment.

    Explanation:

    A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

    Formula for Present value of annuity is as follow

    PV of annuity = P x [ (1 - (1 + r) ^-n) / r ]

    Where P = Annual payment = $5,000

    r = rate of return = 12%

    n = number of years = 7 years

    PV of annuity = $5,000 x [ (1 - (1 + 0.12) ^-7) / 0.12 ]

    PV of Annuity = $22,818.78
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Home » Business » Kristi is considering an investment that will pay $5,000 a year for 7 years, starting one year from today. How much should she pay for this investment if she wishes to earn a 12 percent rate of return?
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