Question

What is the value today of an annuity of $5,900 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 8 percent.

Answer 1

Present value of an annuity of $5,900 per year is $52,460

Step-by-step explanation:

This question will be solved using Advanced Annuity formula as below:

Value of Annuity three years from now =
`P+P [(1-(1+r)^(-(n-1)) )/(r)]`

Value of Annuity three years from now =
`5900+5900 [(1-(1+0.08)^(-22) )/(0.08)]`

Value of Annuity three years from now =
`5900+(5900 X{10.53})`

Value of Annuity three years from now =5,900 + 60,184

Value of Annuity three years from now = 66,084

Present Value of annuity = 66,084 x
`(1+0.08)^(-3)`

Present Value of annuity = 66,084 x 0.79383

Present Value of annuity = $52,460

So the Present value of an annuity of $5,900 per year is $52,460 if the first cash flow received three years from now