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iNCLUDE TABLE PLEASE AND ALL FORMULAS USED. His recently departed dear Aunt Anni

ID: 2383351 • Letter: I

Question

iNCLUDE TABLE PLEASE AND ALL FORMULAS USED.

His recently departed dear Aunt Annie, may she rest in peace, has left Tom a 6-year annuity paying $4,500 per year. He will receive the first payment 4 years from today. If he is discounting at 7% (EAR), what is the present value of his inheritance?

***** I know that for the first 4 years he will not be receiving anything. His payments will start during the 5th year.

5      ------ 4500/(1.07)^5?

6    -------- 4500/(1.07)^6

7

8

9

10

this is the total of the 6 annuity payments, is this correct?

Explanation / Answer

present value of annuity at the end of year 4 = PVAF@7%,6years *cash flow

                                                                = 4.76654 *4500

                                                                 = $ 21,449.43

so present vlaue of annuity today =   PVF@7%,4year * present value of annuity at year4

                                              = .76290 * 21449.43

                                               = $ 16,363.77

**Assuming that he will receive his first annuity at the end of year 5.

**your way is also correct but after summing up,calculate the present value of sum today.