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Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $16,000 per year an...

Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $16,000 per year and is designed to last 9 years. If the interest rate for this problem calculation is 11 percent, what is the most he should have paid for the annuity? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

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Answer #1

Annual payment = $16,000
Number of payments = 9
Interest rate = 11%

First payment is made at the end of Year 3.

Present value of annuity = $16,000/1.11^3 + $16,000/1.11^4 + ... + $16,000/1.11^10 + $16,000/1.11^11
Present value of annuity = $16,000 * (1/1.11)^2 * (1 - (1/1.11)^9) / 0.11
Present value of annuity = $16,000 * 4.493992
Present value of annuity = $71,903.87

So, he should pay a maximum sum of $71,903.87 or $71,904 for this annuity.

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