Final answer:
The student needs to calculate the present value of an ordinary annuity with 20 annual payments of $50,000 using a 5% discount rate. This can be calculated using the present value of an annuity formula, which factors in the payment amount, discount rate, and number of payments.
Step-by-step explanation:
The student is asking to calculate the approximate present value of an ordinary annuity. This involves determining what a stream of 20 annual payments of $50,000, starting one year from now, would be worth in today's dollars given a discount rate of 5%. The present value of an ordinary annuity can be calculated using the formula for present value of an annuity, which takes into account the frequency of payments, the amount of each payment, the interest rate, also known as the discount rate, and the number of payments.
The calculation of the present value of an annuity consists of discounting each payment back to the present value and summing these values. The formula for the present value of an annuity is Pv = Pmt * [(1 - (1 + r)^-n) / r], where Pv is the present value of the annuity, Pmt is the payment amount, r is the discount rate per period, and n is the number of periods. In this case, with a payment (Pmt) of $50,000, a discount rate (r) of 5% (or 0.05), and 20 payments (n), the calculation would give us the present value .