Question

According to the will, you will receive $8,000 per year for the next 20 years, provided you graduate from college in May with a minimum of 3.5 GPA. You are a good student and, therefore, you are confident that you will receive the legacy. If you use a 12% interest rate, what is the value today of theses future payments?

Answer 1

Compute the present value annuity factor (PVIFA), using the equation as shown below:

PVIFA = {1 – (1 + Rate)^{-Number of periods}}/ Rate

                   = {1 – (1 + 0.12)^-20}/ 12%

= 7.46944362384

Hence, the present value annuity factor is 7.46944362384.

Compute the present value of future payments, using the equation as shown below:

Present value = Annual payments*PVIFA

                     = $8,000*7.46944362384

                     = $59,755.5489907

Hence, the present value of payments is $59,755.5489907.