Suppose that you are examining an asset that promised to pay $500 at the end of each of the next...

Question:

Suppose that you are examining an asset that promised to pay $500 at the end of each of the next 5 years.

If you are looking for 10% per annum interest on your money, then how much would you offer for this annuity?

Present Value of Annuity

Present value of annuity is the current worth of a series of periodic payments in the future. The core concept is the time value of money that states that a dollar in hand today is worth more than that same dollar to be received in the future.

Answer and Explanation: 1

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Given -

  • Annual Payments = $500
  • Time = 5 years
  • Rate = 10% = 0.10

We can calculate the present value of this annuity (annual cash inflow) to determine...

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How to Calculate the Present Value of an Annuity

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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.

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