Question

3. What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 10%?

a. $ 670.44 b. $ 758.16 c. $1,121.70 d. $1,470.21 e. $1,500.00

Answer #1

Formula for PV of annuity:

PV = C x [1-(1+r)^{-n}/r]

C = Periodic cash flow = $ 200

r = Rate per period = 10 % or 0.1 p.a.

n = Numbers of periods = 5

PV = $ 200 x [1-(1+0.1)^{-5}/0.1

= $ 200 x [1-(1.1)^{-5}/0.1

= $ 200 x [(1- 0.6209213230592)/0.1]

= $ 200 x [0.3790786769408/0.1]

= $ 200 x 3.790786769408

= $ 758.1573538816 or **$
758.16**

Hence option “b. $ 758.16” is correct answer.

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