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Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today? Round to the nearest cent.

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beritop1089

Answer:

8,478.76

Explanation:

This is a time value of money (TVM) question; an ordinary annuity.

Using a financial calculator, input the following to calculate the PV of the annuity;

Recurring quarterly payment = 600

Quarterly interest rate ; I = 6%/4 = 1.5%

Duration of annuity = 4*4 = 16

One time future cashflow; FV = 0

then compute a PV = $8478.76

Therefore, she must invest $8,478.76 today to meet the annuity payments

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