Question

Suppose that for valuing an annuity for gift tax purposes, the IRS currently requires a discount rate of APR=10% compounded. What is the value today of an annuity with 24 quarterly payments of $600,000 if the first payment begins 6 months from today?

Answer 1

Solution =

Interest Rate APR = 10%

The rate for a quarter = 10% * 3/12 = 2.5%

The Value of annuity of $600000 and 24 quarterly installments is

= 600000 * PVAF(2.5% , 24) = 600000 * 17.88498 = 10730988

This is the PV at the date of 3 Months after today or we say 3 months before the payment started

In the PVAF the amount is considered as received at the end of month , quarter , year etc..

Therefore now the value of it today = 10730988 / ( 1 + 0.025)

= 10730988/1.025 = 10469257 $