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Calculate the annual cash flows (annuity payments) from a fixed-payment annuity if the present value of...

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Finance

Calculate the annual cash flows (annuity payments) from afixed-payment annuity if the present value of the 25-year annuityis $1.9 million and the annuity earns a guaranteed annual return of13 percent. The payments are to begin at the end of sevenyears.

Answer & Explanation Solved by verified expert
4.5 Ratings (997 Votes)

Step-1:Calculation of value of fund 6 years from now
Future value of fund = Investment x Future value of 1 in 6 years
= $       19,00,000 x 2.081952
= $ 39,55,708.33
Working:
Future value of 1 in 6 years = (1+i)^n Where,
= (1+0.13)^6 i 13%
= 2.081951753 n 6
Step-2:Calculation of annual cash flows (Annuity)
Annual cash flows = Investment amount 6 years from now / Present value of annuity of 1
= $ 39,55,708.33 / 7.329985
= $    5,39,661.18
Working;
Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.13)^-25)/0.13 i 13%
= 7.329984978 n 25
The question is based upon time value of money.
All the formulas are used based upon time value of money.

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Transcribed Image Text

Calculate the annual cash flows (annuity payments) from afixed-payment annuity if the present value of the 25-year annuityis $1.9 million and the annuity earns a guaranteed annual return of13 percent. The payments are to begin at the end of sevenyears.

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