What is the present value of a 4-year ordinary annuity of $2,000 per year plus an additional...

Question:

What is the present value of a 4-year ordinary annuity of $2,000 per year plus an additional $3,000 at the end of year 4 if the interest rate is 5%?

Present value of an Annuity

An annuity is a stream of equal cash flows occurring at regular intervals of time. When the cash flows occur at the end of each period, the annuity is called an ordinary annuity.The present value of an annuity is obtained by multiplying the annuity amount by the relevant present value annuity factor.

Answer and Explanation: 1

  • The present value can be calculated as follows:

Present value = ( 2000 * PVIFA5%,4years) + (3000 * PVIF5%,4years)

where PVIFA5%,4years is the present value of an annuity of $1 for 4 years at 5% = 3.546.{ Note that the amount is an annuity}

PVIF5%,4years is the present value of $1 received at the end of year 4 at 5% = 0.823

  • Present value = (2000 * 3.546) + (3000 * 0.823)

= $9561


Learn more about this topic:

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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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