Present Value of an Annuity
The Present Value of an Ordinary Annuity is calculated by using the following formula
Present Value of an Ordinary Annuity = P x [{1 - (1 / (1 + r) n} / r]
Annual Payment (P) = $300 per year
Annual Interest Rate (r) = 8% per year
Number of years (n) = 5 Years
Therefore, the Present Value of an Ordinary Annuity = P x [{1 - (1 / (1 + r) n} / r]
= $300 x [{1 - (1 / (1 + 0.08)5} / 0.08]
= $300 x [{1 - (1 / 1.46933)} /0.08]
= $300 x [(1 - 0.68058) / 0.08]
= $300 x [0.31942 / 0.08]
= $300 x 3.99271
= $1,197.81
“Hence, the Present Value of an Annuity = $1,197.81”
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