Asked Feb 11, 2020

an investment is expeted to result in equal payments of $9740.00 at the end of each month for the next 7 years (ordinary annuity).

Compounding: 12 times per year

If the appropriate required rate of return (discount rate) is 4% what is the present value of the annuity stream?


Expert Answer

Step 1

We need to use the concept of time value of money to solve the question. According to the concept of time value of money, the value of money available at the present time is more compared to the same sum in some future time. This is because of the earning potential of money, that is, we can earn interest on money by investing.

Step 2

Given that the equal monthly payments is $9740
Time period is 7 years
As the payment is made monthly, the number of periods is 7 multiplied by 12 that is equal to 84
The required rate of return is 4%. 
As the payment is made monthly, the monthly rate of return is 4% divided by 12 that is equal to 0.003333333

Step 3

Now, we can determine the present v...

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