Question

what is the present value of a $300 annuity payment over 5 years if interest rates...

what is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?


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Answer #1

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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