Question

An annuity will pay eight annual payments of $100, with the first payment to be received one year from now. If the interest rate is 12 percent per year, what is the present value of this annuity? Use the appropriate table located at the end of the textbook to solve this problem.

a) $497
b) $556
c) $801
d) $897

Answer 1

The present value of this annuity is (c) $801.

Explanation:

To calculate the present value of the annuity, you can use the present value of an ordinary annuity formula. In this case, it would be PVA = PMT * [(1 - (1 + r)^(-n)) / r], where PMT is the annual payment, r is the interest rate per period, and n is the number of periods. Plugging in the values for this annuity, you get PVA = $100 * [(1 - (1 + 0.12)^(-8)) / 0.12], which equals approximately $801.

The present value represents the current worth of the future cash flows, considering the time value of money and the specified interest rate. In this scenario, it indicates the amount one would be willing to invest now to receive eight annual payments of $100 each at a 12 percent interest rate.

Option C is correct.