Question

Assume that you just received an ordinary annuity with 5 annual payments of $1,000 each. You plan to invest the payments at a 6% annual interest rate. What will the value of the first payment be at the end of the 5th year?

Answer 1

$1,262.48

Step-by-step explanation:

The computation of the first payment is shown below:

= Annual payments × (1 + rate) ^ remaining years

= $1,000 × (1 + 0.06) ^ 4 years

= $1,000 × 1.06 ^ 4 years

= $1,262.48

The remaining years would be

= 5 years - 1 years

= 4 years

Since from 1 year to 5 years, the number of years would be 4 and the same is considered in the computation part