Hector will be receiving annual payments from an insurance policy that are repre

Question

Hector will be receiving annual payments from an insurance policy that are represented by an ordinary annuity of $5200 that makes consecutive annual payments for a total of 8 years. The insurance company has however negotiated the terms of the policy such that the annuity will not begin at the end of year 1, but instead Hector will not receive the 8 year annuity's first payment until the end of year 5. Determine the equivalent present value of the policy to Hector if the interest rate is 5.80% Place your answer in dollars and cents. DO NOT USE A DOLLAR SIGN OR A COMMA IN YOUR ANSWER. Work your analysis using at least four decimal places of accuracy

Explanation / Answer

PV of annuity can be calculated using PV function on a calculator

N = 8, PMT = 5,200, I/Y = 5.80%, FV = 0 => Compute PV = $32,548.09

But this will be the value of annuity at the end of year 4.

Its Value today = FV / (1 + r)^n = 32,548.09 / (1 + 5.8%)^4 = $25,976.63

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