Question

Find the present value of an ordinary annuity which has payments of $1000 per year for 8 years at 6% compounded annually.

Answer 1

The formula for the present value of an ordinary annuity is :

`P=PMT*(1-(1)/((1+r)^n))/(r)`

where P = present value

PMT = annuity payments

r = interest rate

n = number of period in which payments will be made

From the problem, we have :

PMT = $1000

r = 6% or 0.06

n = 8

Using the formula above :

`\begin{gathered} P=1000*(1-(1)/((1+0.06)^8))/(0.06) \\ P=6209.79 \end{gathered}`

The answer is $6,209.79