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Basic concepts in Finance

You currently receive \$10,000 per year on an annuity contract. It will expire in 8 years. Someone wants to buy the contract from you. If you can earn 12% on other investments of the same quality and risk, how much would you be willing to sell the contract for?

You can insulate your home for \$7,500. You figure you can save 15% per year on your heating bill if you insulate. Your home was bought 10 years ago for \$45,500. You figure real estate prices have gone up 16% each year. You plan to live in the house another 10 years. Your home has five bedrooms, 2,500 square feet and requires 5,500 BTU's per hour to heat. You heat with oil and use 175 barrels of oil per year. Oil currently costs \$100 per barrel. Money is worth 5% to you. Should you insulate your home. Why? Or why not

Solution Preview

You currently receive \$10,000 per year on an annuity contract. It will expire in 8 years. Someone wants to buy the contract from you. If you can earn 12% on other investments of the same quality and risk, how much would you be willing to sell the contract for?

Annuity amount to be received per year=R=\$10000

Number of periods=n=8

Required rate of ...

Solution Summary

There are two problems. Solution to first problem depicts the steps to estimate the current value of a contract. Solution to second problem determines if it is advisable to insulate the home.

\$2.19