A real estate investor wants to purchase a rental property that generates an annuity payment of $3,500 per month. If the interest rate is 5 percent, how much should the investor invest today to receive the desired monthly payment for the next 10 years? Round your answer to the nearest whole dollar.
To find out how much the investor should invest today to receive the desired monthly payment for the next 10 years, we can use the present value of an annuity formula:
PV = PMT * ((1 - (1 + r)^-n) / r)
Where:
PV = Present Value
PMT = Monthly payment ($3,500)
r = Interest rate (5% or 0.05)
n = Number of periods (10 years or 120 months)
Plugging in the values:
PV = $3,500 * ((1 - (1 + 0.05)^-120) / 0.05)
PV = $3,500 * ((1 - 0.61391) / 0.05)
PV = $3,500 * (0.38609 / 0.05)
PV = $3,500 * 7.7218
PV = $27,025.30
Therefore, the investor should invest approximately $27,025 today to receive the desired monthly payment for the next 10 years.