Can someone please assist me withthis? I get confused on which formula to use wh
ID: 2662303 • Letter: C
Question
Can someone please assist me withthis? I get confused on which formula to use when and whetherthere are multiple steps or not. Please help.Sally will receive $19,500 for the next 20 years as a payment for anew book she has written. If a 10% rate is applied, should she bewilling to sell out her future rights now for $160,000?
What I think I should is find 10% for a period of 20 years, whichis 0.149 using the present value of $1 formula--but then I getlost. I am not even sure if I should be using presentvalue.
Explanation / Answer
So here we are looking at an Annuity whose Annual payment PMT is$19,500, So PMT= 19,500, n=20 Yrs, I=10% = 0.10. We need to calculatethe FV of annuity which is given by FVA = PMT*{(1+Int)^n - 1}/Int. If PV of FVA is more than $160,000, then Sally shouldnot forego herrights. Putting values, we get FVA = 19500*{(1+0.1)^20 - 1}/0.1 = 19500*5.7275/0.1 = 19500*57.275= 1,116,862.50 PV of this FVA is givenby PV = FV/(1+i)^n = 1116862.50/(1+0.1)^20 = 1116862.50/6.7275 =$166,014.5 As PV of future annuity is more than $160,000, Sally shouldnotforego her right to receive $19500 for next 20 yrs.