Question

Peter has an inheritance that promises to pay him 11 year-end amounts of $5,000 starting exactly 3 years and 3 months from today. If he earns 4.2% p.a., how much is the inheritance worth in present-day dollars?

Select one:

a. $39,502.38

b. $37,910.15

c. $41,154.33

d. $42,258.17

Answer 1

Present value of annuity 3 years and 3 months from today is calculated below

Where, PVA is present value of annuity

A is annual payment

r is interest rate

n is number of years

Therefore PVA starting 3 years and 3 months from today =

= 5000*8.666737

= $43333.685

Present value today of the lump sum amount of $43333.685 is calculated below

Present Value = Future Value/(1+r)n

PV = $43333.685/(1+0.042)^(3+3/12)

PV = $43333.685/(1.042)^3.25

PV = $43333.685/1.143062788

= $37910.15

Therefore, correct option is b.