Question

Present Value of an Annuity

Determine the present value of $140,000 to be received at the end of each of four years, using an interest rate of 6%, compounded annually, as follows:

a. By successive computations, using the present value of $1 table in Exhibit 5. Round to the nearest whole dollar.

First year$

Second Year  

Third Year  

Fourth Year  

Total present value$

b. By using the present value of an annuity of $1 table in Exhibit 7. Round to the nearest whole dollar.
$

c. Why is the present value of the four $280,000 cash receipts less than the $1,120,000 to be received in the future?
The present value is less due to   over the 4 years.

Answer 1

Note: the aount of cash receipts given in starting is 140,000 where as in part c is 280,000, so please comment if the answer does not match

a		working
First year	132,076	=(140000*0.94340)
Second Year	124,600	=(140000*0.89000)
Third Year	117,547	=(140000*0.83962)
Fourth Year	110,893	=(140000*0.79209)
Total present value	485,116
b
Present value = 140000*3.46511=	485,115

c.

The present value is less due to the compounding of interest over the 4 yrs.