Question

A contract specifies that a company will receive $80,000 each year for a period of 10 years, but the first payment will not be received until three years from now. What is the present value of these payments if the interest rate is 6 per cent?

Answer 1

The present value of future payments can be calculated using the formula for present value of an ordinary annuity: Present Value = Payment / (1 + interest rate)^n. Plugging in the values of the payment, interest rate, and number of years gives the present value of the payments.

Step-by-step explanation:

The present value of future payments can be calculated using the formula for present value of an ordinary annuity. The formula is:

Present Value = Payment / (1 + interest rate)n

where Payment is the amount received each year, interest rate is the annual interest rate, and n is the number of years. In this case, the Payment is $80,000, the interest rate is 6%, and the number of years is 10. Plugging these values into the formula gives:

Present Value = $80,000 / (1 + 0.06)3 + $80,000 / (1 + 0.06)4 + ... + $80,000 / (1 + 0.06)12

Evaluating this expression gives the present value of the payments.