Question

You will receive annual payments of $5,000 at the end of each year for 10 years, but the first payment will be received in year 3. What is the present value of these payments if the discount rate is 6 percent?

		$30,898.36
		$24,387.13
		$26,260.49
		$28,251.12

Answer 1

Present value of these payments at the end of year 3
Present Value Of An Annuity
= C*[1-(1+i)^-n]/i]
Where,
C= Cash Flow per period
i = interest rate per period
n=number of period
= $5000[ 1-(1+0.06)^-10 /0.06]
= $5000[ 1-(1.06)^-10 /0.06]
= $5000[ (0.4416) ] /0.06
= $36,800.44
Present value of 36,800.44 today
PV= FV/(1+r)^n
Where,
FV= Future Value
PV = Present Value
r = Interest rate
n= periods in number
= $36800.44/( 1+0.06)^3
=36800.44/1.19102
= $30898.36