Question

You expect to receive annual gifts of $1,000 at the end of Years 1 and 2 and $1,500 at the end of Years 3 and 4. Which of these is the correct present value of multiple annuities formula if the rate is 6 percent

Answer 1

Total Present Value = 4280.962

Step-by-step explanation:

The correct Present Value formulae

PV of annuity formula:

PV = A× 1 -(1+r)^(-n)/r

PV - Present value of annuity'

A- Annual cash flow

r- discount rate per period

n- number of period

First set of cash inflows i.e 1,000 for year 1 and 2

1,000 × ( 1- 1.06^(-2) )/0.06

PV =1,833.39

Second set of cash flows i.e year 3 and 4

Year 3 and Year 4

1,500 × (1- 1.06^(-2) )/0.06 × 1.06^(-2)

= 2,447.569

Total PV = 1,833.39 + 2,447.569 = 4280.962086

Total Present Value = 4280.962