Question

Betty Kay has a contract in which she will receive the following payment for the next 5 year: $1,000, $2,000, $3,000, $4,000 and $5,000. She will then receive an annuity of $8,500 a year for the end of the 6th through the end of the 15th year. She is offered a $30,000 to cancel the contract. If the payments are discounted at 14 percent should she cancel the contract? Show all workings.

Answer 1

compute Present value of annuity at the end of 5^th year

we know Pmt = 8500

N=10, and R =14%

compute the Present value of all cash flows including the PV of annuity.

 

Betty should not cancel the contract as payments have higher present value compared to 30000