Question

Suppose that you will receive annual payments of $12,500 for a period of 10 years. The first payment will be made 9 years from now. If the interest rate is 6%, what is the present value of this stream of payments? (Do not round intermediate calculations. Round your answer to 2 decimal places.) SOLVE USING EXCEL FUNCTIONS

Answer 1

Given that there will be payments of 12500 starting from 9th year for 10 years. So, from 9th year to 18th year.

So, calculating value of the payments at the end of 8th year using annuity formula as (P(1-(1+r)^-n))/r

On substituting, we get (12500*(1-(1.06)^-10))/0.06.

This can be calculated using excel function. Let cell A1 contain 12500, B1 contain 6%. Then it is calculated in D1 as =(A1*(1-(1+B1)^-10))/B1

It gives 92001.1

Now, we need to discount it to present value by discounting it back to 8 years. So, 92001.1/1.06^8. Using excel function it will be D1/(1+B1)^8. It gives 57722.62

So, Present value of the given stream of payments is $57722.62