Question

Brief Exercise A-11 Robben Company is considering investing in an annuity contract that will return $32,500 annually at the end of each year for 18 years. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What amount should Robben Company pay for this investment if it earns an 10% return? (Round answer to 2 decimal places, e.g. 25.25.) Robben Company should pay $

Answer 1

Annual return = $32,500

Time period (n) = 18 years

Interest rate (i) = 10%

Present value of investment = Annual return x Present value annuity factor (i%, n)

= 32,500 x PVAF (10%, 18)

= 32,500 x 8.20141

= $266,545.83

Hence, Robben company should pay = $266,545.83

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