Question

Present value of annuity: What is the present value of an annuity of $27 received at the beginning of each year for the next six years? The discount rate is 10%.

a) $100
b) $120
c) $130
d) $110

Answer 1

To calculate the present value of an annuity, you can use the formula Present Value = Payment / (1 + r)^n, where Payment is the amount received at the beginning of each period, r is the discount rate, and n is the number of periods. In this case, the present value of the annuity is approximately $15.25.

Step-by-step explanation:

To calculate the present value of an annuity, we use the formula:

Present Value = Payment / (1 + r)n

where Payment is the amount received at the beginning of each period, r is the discount rate, and n is the number of periods.

In this case, the payment is $27, the discount rate is 10%, and the annuity lasts for 6 years.

So the present value of the annuity is:

Present Value = $27 / (1 + 0.10)6

Calculating this, we get:

Present Value = $27 / 1.7716

Present Value ≈ $15.25