Question

• Receiving $80,000 per year for five years is equivalent to investing what amount today at 14 percent? Provide a mathematical formula to solve this problem, assuming use of a present value annuity table to convert the future cash flows to their present value equivalents. Provide the expression for the Excel spreadsheet function that would perform the present value conversion.

Answer 1

Present Worth Factor (PWF)=(P/A,i,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=Interest Rate =14%=0.14

N=number of Years =5

PWF=(P/A,14%,5)=((1.14^5)-1)/(0.14*(1.14^5))

Present value of $80000 per year for 5 years at 14%=PWF(P/A,14%,5)*$80000

Present value of $80000 per year for 5 years at 14%=80000*(((1.14^5)-1)/(0.14*(1.14^5)))

Present value of $80000 per year for 5 years at 14%=80000*3.433081=$274,646.48

We can also get the answer by using excel PV function with the following parameters:

Rate=14%, Nper=5, Pmt=-80000

Excel Command: =PV(14%,5,-80000)

$274,646.48

(Using excelPV function with Rate=14%, Nper=5, Pmt=-80000)