Answered: An investment that will give you…

An investment that will give you monthly payments for 14 years costs $146,897. If your required return is 10.68%, what is the monthly payment?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 27P

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Concept explainers

Types of Insurance Contract

Insurance is a contract wherein an individual or entity gets financial protection from the insurance company for any damages or losses incurred. The individual or entity is called the insured, whereas the insurance company is called the insurer. The insured and the insurer enter a legal contract for a fixed term called the insurance term, and the contract is called an insurance policy.

Question

An investment that will give you monthly payments for 14 years costs $146,897. If your required return is 10.68%, what is the monthly
payment?
Mo
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Expert Solution

Step 1

An annuity is a series of cash flows that involve equivalent periodic amounts at equal time intervals over a specific duration. It can be classified into two types, i.e., an ordinary annuity that involves cash flows at the end of each time interval, and an annuity due that involves cash flows at the starting of each time interval.

The present value of an annuity represents a sum of all the discounted cash flows in that annuity. Furthermore, each cash flow must be discounted at a required rate of return.

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