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Estimating the fair value of an annuity

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You are the manager of an annuity settlement company. Jim Patton just won the state lottery which promises to pay him $1,000 per year for 20 years, starting from today, and $2,000 per year for years 21-45, given a 9% discount rate. Your company wants to purchase the proceeds from the lottery from Jim. What is the most that your company can offer?

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Solution Summary

Solution describes the steps to estimate the current value of given annuity.

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Please refer attached file for better clarity of tables.

Year Cash Flow PV
n C C/(1+9%)^n
1 1000.00 917.43
2 1000.00 841.68
3 1000.00 772.18
4 1000.00 708.43
5 1000.00 649.93
6 1000.00 596.27
7 1000.00 547.03
8 1000.00 501.87
9 1000.00 460.43
10 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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