Question

Antonia receives a $10,000 benefit payment at the end of each year. She can invest these payments in an account yielding 4% Interest,

compounded annually. Assuming she just received this year's payment, what is the present value of her next five payments?
A
$20,352
B. $41,253
C. $44,518
D.
$44,815

Answer 1

C. $44,518

Explanation:

just answered it and got it right

Answer 2

C. $44,518

Explanation:

Because the equal payments occur at the end of each year, we know we have an ordinary annuity.

The equation for calculating the present value of an ordinary annuity is:

PVOA = FV {[1 - (1 / (1 + i)ⁿ)] / i}

PVOA = $10,000 {[1 - (1 / (1 + 0.04)⁵)] / 0.04}

PVOA = $10,000 {4.4518}

Here PVOA Factor is 4.4518 for n = 5 and i = 4%

PVOA = 44,518

This PVOA calculation tells you that receiving $44,518 today is equivalent to receiving $10,000 at the end of each of the next five years, if the time value of money is 4% per year. If the 4% rate is Antonia's required rate of return, this tells you that Antonia could pay up to $44,518 for the five-year annuity.