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What is the value today of a 15-year annuity that pays $640 a year? The annuity's first payment...

Question:

What is the value today of a 15-year annuity that pays $640 a year? The annuity's first payment occurs six years from today. The annual interest rate is 10 percent for Years 1 through 5, and 12 percent thereafter.

Present Value of a Perpetuity:

An annuity is a stream of cash flows of the same amount that is payable for a predetermined period of time. Many fixed incomes are distributed in the form of an annuity, e.g., pension. A special kind of annuity runs forever, and is called a perpetuity. The present value of a perpetuity is equal to the periodic payment divided by the discount rate.

Answer and Explanation:

The value of the annuity today is $4,478.

The present value of cash flow for year 1 through 5 is {eq}\sum_{t=1}^{5}{\frac{640}{(1 + 10\%)^t}} =...

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How to Calculate the Present Value of an Annuity

from Business 110: Business Math

Chapter 8 / Lesson 3
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