Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return?

She should pay $22,113 for this investment

Explanation:

A fix payment for a specified period of time and compounding on specified rate is called annuity. $5,000 per year payment for seven years is also an annuity and its today value can be determined by following formula

Present value of Annuity = P [ 1 - ( ( 1 + r )^-n ) / r ]

P = Payments = $5,000

r = required rate of return = 13%

n = Number of years = 7

Present value of Annuity = $5,000 x [ 1 - ( ( 1 + 13% )^-7 ) / 13% ]

Present value of Annuity = $5,000 x [ 1 - ( ( 1 + 0.13 )^-7 ) / 0.13 ]

Present value of Annuity = $5,000 x [ 1 - ( ( 1.13 )^-7 ) / 0.13 ]

Present value of Annuity = $5,000 x 4.42261

Present value of Annuity = $22,113

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