Question

You own a contract that promises an annuity cash flow of $150 year-end cash flows for...

You own a contract that promises an annuity cash flow of $150 year-end cash flows for each of the next 3 years. (Note: The first cash flow is exactly 1 year from today). At an interest rate of 11%, what is the present value of this contract?

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Answer #1

answer:

given data,

  • an annuity cash flow of $150 year-end cash flows for each of the next 3 years.
  • an interest rate of 11%,
  • we have to find out the the present value of this contract?
  • here we know the formula of teh present value of this contract: Annuity * [ 1 - 1 / ( 1 + R)n] /R
  • now substitute the values in the above formula:

= 150 * [ 1 - 1 / ( 1 + 0.11)3] / 0.11  

= 150*(1-1/(1.11)3)/0.11

= 150*(1-1)/(1.11*3)/0.11

=150*(2.443715)

=150*2.443715

= 366.557

the present value of this contract is (   366.557 )

366.557
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