3 Susan will receive a settlement of 125000 annually for ten

3) Susan will receive a settlement of $125,000 annually for ten years, if she trades it today for a single payment it will be discounted at 6 percent. A) How much will she receive today? B) What is the PV of her this settlement? C) What is the FV is this settlement?

Solution

Annual Payment = $125,000
Discount Rate = 6%
Period = 10 years

Answer A.

Present Value of Payments = $125,000/1.06 + $125,000/1.06^2 + ... + $125,000/1.06^10
Present Value of Payments = $125,000 * (1 - (1/1.06)^10) / 0.06
Present Value of Payments = $125,000 * 7.3601
Present Value of Payments = $920,013

So, Susan will receive $920,013 today

Answer B.

Present Value of her settlement is $920,013

Answer C.

Future Value of her Settlement = $125,000*1.06^9 + $125,000*1.06^8 + $125,000*1.06^7 + ... + $125,000*1.06 + $125,000
Future Value of her Settlement = $125,000 * (1.06^10 - 1) / 0.06
Future Value of her Settlement = $125,000 * 13.1808
Future Value of her Settlement = $1,647,600