Question
For tax reasons, your client wishes to purchase an annuity that pays $90,000 each year for 9 years, with the first payment in one year.
For tax reasons, your client wishes to purchase an annuity that pays $90,000 each year for 9 years, with the first payment in one year. At an interest rate of 7% and focusing on time value of money without consideration of any fees, how much would the client need to invest now? Equivalent problem structure (in neutral time-value-of-money terms): What is the present value of an annuity that pays $90,000 each year for 9 years, assuming a discount rate of 7% and the first payment occurs one year from now? Equivalent problem structure (as a borrower): How much could you borrow today in exchange for paying back $90,000 each year for 9 years, assuming an interest rate of 7% and the first payment occurs one year from now? Please round your answer to the nearest hundredth.
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