Question

What amount comes closest to the present value of an annuity of 15 consecutive annual payments of $1,000 if the annuity does not start making payments until the end of the fifth year (payments from year 5 through 19)

Answer 1

$8132.73

Step-by-step explanation:

Using Financial calculator, we have:

PMT = -1000 (Annual payments)

n = 15 years (year 5-19)

FV = 0 (no future value at end of year 19 is given)

i/r = 5% (Let us assume the annual interest rate is 5%)

PV = ? (the value at end of year 5)

PV = $10,379.66

--> PV of the annuity at the moment is = $10,379.66 / (1+0.05)^5 = $8132.73