Question

What is the present value of a five-year $20,000 ordinary annuity plus of a lump sum of $110,000 at the end of year 5.

Discount rate of 12%

Can you teach me how to do this on excel?

Answer 1

Solition:

Calculation of present value:

Formula to calculate present value of ordinary annuity is;

Present value=Annuity*PVAF(12%,5)

=$20,000*3.6048

=$72,095.52

Now,calculate the present value of future value to be received at the end of $110,000 as follows

Present value=Future value/(1+rate)^no.of years

=$110,000/(1+0.12)^5

=$62,416.95

Thus,present value is;

=Present value of ordinary annuity+Present value of future value

=$72,095.52+$62,416.95

=$134,512.47

You can use the present value function in excel to calculate the same.In case of excel,input used is:

'=PV(rate,nper,pmt)'

Rate=0.12

Nper=no. of payment period,I.e. 5(in the given case)

Pmt=payment per period i.e 20000 in given case.