Question

Abbi is receiving an insurance payout and has a choice of the following when money is worth 5.5% compounded annually:

Option 1 $8 000 per year paid at the end of each year for 9 years

Option 2 $15 000 paid now, $12 000 paid 2 years from now, and $6 000 paid 9 years from now

What is the PV of Option 1?

Select one:

a. $55830

b. $57839

c. $58677

d. $55618

Answer 1

Present Value of Option-1 (Present Value of an Ordinary annuity)

Annual payment (P) = $8,000 per year

Annual interest rate (r) = 5.50% per year

Number of periods (n) = 9 Years

Therefore, the Present Value of an Ordinary annuity = P x [{1 - (1 / (1 + r) n} / r]

= $8,000 x [{1 - (1 / (1 + 0.0550)9} / 0.0550]

= $8,000 x [{1 - (1 / 1.619094273)} / 0.0550]

= $8,000 x [{1 - 0.617629261} / 0.0550]

= $8,000 x [0.382370739 / 0.0550]

= $8,000 x 6.952195249

= $55,618

“Hence, the Present Value of Option-1 will be d. $55,618“