This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 3-4 Present Value of an Annuityyou win the Texas Lottery: $1,000,000you get $50,000 per year for 20 yearsso 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 annuitynamely: the present value of the annuityFormula for present value of an annuity:PV = PMTiin-+-)1(1= PMT a n ia angle n at iFor the lottery, that's 08.08.1150000020--= $490,907.37Less than half of what you thought you won!Mortgages and other time paymentstime payments are annuities to be received by your creditoryour loan amount is the present valueof that annuityyou could (if you wanted to) investthe loanmake the payments as scheduledand your loan would be paid off when you make the last paymentExample:30 year, $100,000 mortgage, financed at 12% per yearcompute monthly amortization payment (PV formula):100000 = PMT (1 - (1.01)-360)/.013-4p. 1monthly amortization...
View Full Document
- Spring '11