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Unformatted text preview: 3-4 Present Value of an Annuity•you win the Texas Lottery: $1,000,000•you get $50,000 per year for 20 years•so you've won $1M, right? WRONG-G-G-G!!!•what you have won is an annuity, whose actual value is:•what the lottery agency would need to invest TODAY •to make the paymentson that annuity•namely: the present value of the annuityFormula for present value of an annuity:PV = PMTiin-+-)1(1= PMT a n i“a angle n at i”For the lottery, that's 08.08.1150000020--= $490,907.37Less than half of what you thought you won!Mortgages and other time payments•time payments are annuities to be received by your creditor•your loan amount is the present valueof that annuity•you could (if you wanted to) investthe loan•make the payments as scheduled•and your loan would be paid off when you make the last paymentExample:•30 year, $100,000 mortgage, financed at 12% per year•compute monthly amortization payment (PV formula):100000 = PMT (1 - (1.01)-360)/.013-4p. 1•monthly amortization...
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- Spring '11