A special investment firm, d, will return a year income of $5000 for the next 8 years. The interest rate is deemed to be 5% p.a over the 8 year period (compounded anually). What would be the maximum amount which should be paid now for the investment if the purchaser is to break even?
This is the PV of an annuity. The purchaser must invest a total of $32,316.06 now in order to enable him to receive $5,000 annual payments for 8 years @ 5% comp. annually. The purchaser will receive a total of $40,000 over 8 years. The difference of $40,000 - $32,316.06 =$7,683.94 is the interest he will have earned on his investment.
