Question

What’s the present value of a 4- year annuity of $2,250 per year plus an additional $3,800 at the end of year 4 if the interest rate is 5% ?

Answer 1

             

Year	Cash flows	Discounting Factor; Df = Cash flows / (1+Rate)^Year	Present Values = Cash flows x Df
1	$2,250.00	0.952380952	$2,142.86
2	$2,250.00	0.907029478	$2,040.82
3	$2,250.00	0.863837599	$1,943.63
4	$6,050.00	0.822702475	$4,977.35
		Total = Present Value = PV	$11,104.66

Answer: Present value = Sum of total Present values at each year i.e PV = $ 11,104.66 (Rounded near to two decimals.

Note:

# Year 4 has two cash flows which is clubbed. We got $ 6050 as total cash flow at year 4 ($2250+$3800 = $ 6050)

# Rate = 5%