# A financial company that advertises on television will pay you $56,000 now for annual payments of... ## Question: A financial company that advertises on television will pay you$56,000 now for annual payments of $9,500 that you are expected to receive for a legal settlement over the next 9 years. Assume you estimate the time value of money at 12 percent. What is the present value? Would you accept this offer? ## Annuity An annuity is a series of equal cash flows (either incoming or outgoing) which will occur at regular intervals in the future. The present value of these cash flows can be calculated based on a formula. ## Answer and Explanation: 1 While it is not specifically stated in the problem, we will assume that the annual payments of$9,500 will occur at the beginning of each year, so that the cash flows represent an annuity due.

The formula for the present value of an annuity due is:

where:

• PV = present value
• P = amount of periodic payment
• r = interest rate
• n = number of payments

So, for the legal settlement, the inputs are:

• P = $9,500 • r = 12% • n = 9 and the formula is: So, the present value of the legal settlement is$56,693.

Since that amount is greater than the amount offered on TV by the financial company, you would not accept the offer.

How to Calculate the Present Value of an Annuity

from

Chapter 8 / Lesson 3
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Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.