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assume you receive $500 a year beginning at the end of year 5 and ending at...

assume you receive $500 a year beginning at the end of year 5 and ending at year 20, the interest rate is 4% determine the present value of the cash flows

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Answer #1

We will calculate the present value of annuity at the end of 5th year, then we will further find the present value of this cash flow at year 0.

Present Value of Annuity = P * [(1-(1+R)^-N)/R]

Where P = payment

R = Rate of interest

N = Number of payments

Present Value of Annuity = 500 * [(1-(1+4%)^-16)/4%]

= 500 * [(1-(1.04)^-16)/0.04]

= 500 * [0.46609182431/0.04]

= 500 * 11.6522956078

Present Value at the end of 5th year = $5826.1478039

Present Value = Future Value / (1+Interest rate)^Number of year

= 5826.1478039 / (1+ 4%)^4

= 5826.1478039 / (1.04)^4

Present Value = $4980.21556033

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