Question

Present Value PV of an Annuity

Year of 1 at 15% of 1 at 15%
1 .870 .870
2 .756 1.626
3 .658 2.283
A) $45,792.
B) $45,180.
C) $29,232.
D) $38,376.

Answer 1

To calculate the present value of an annuity, multiply the payments by the present value factors for each year and add up the results.

Step-by-step explanation:

The present value (PV) calculations ask what the amount in the future is worth in the present, given the 15% interest rate. To calculate the PV of an annuity, you multiply the yearly payments by the corresponding present value factor for each year. For example, for year 1, you multiply the payment of 1 by the present value factor of 0.870, which gives you a present value of 0.870. You continue this calculation for each year and add up the present values to get the total present value of the annuity. In this case, the total present value of the annuity is $45,792 (option A).