Question

On 12-31-15, Austin entered into an agreement that required Austin to pay a supplier $100 every year on 12-31 until 2026. The agreement required Austin to make the first annual payment on 12-31-19. Assume the market rate of interest for Austin is 4%. As of 12-31-15 what was the present value of Austin’s obligation?

Answer 1

As of 12-31-15 the present value of Austin’s obligation was $ 598.54

Present value	=	Annual Cash flow	*	Present value of annuity of 1 for 8 years	*	Present value of 1 received at the end of year 3
	=	$ 100.00	*	6.732745	*	0.888996
	=	$ 598.54
Working;
Present value of annuity of 1 for 8 years	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.04)^-8)/0.04		i	=	4%
	=	6.732745		n	=	8
Present value of 1 received at the end of year 3	=	(1+i)^-n		Where,
	=	(1+0.04)^-3		i	=	4%
	=	0.888996		n	=	3