Question

What is the present value of a four-period annuity of $150 per year that begins two years from today if the annual rate of return on similar investments is 9%?

Answer 1

$409.02

Step-by-step explanation:

In the first place, we need to determine the present value of the yearly annuity at the beginning of payout in 2 years:

PV=yearly payment*(1-(1+r)^-n/r

yearly payment=$150

r=annual rate of return on similar investments =9%

n=number of annual payments=4

PV=$150*(1-(1+9%)^-4/9%

PV=$150*(1-(1.09)^-4/9%

PV=$150*(1-0.708425211 )/9%=$485.96

Present value in 2 years=future value today=$485.96

PV=$485.96 /(1+9%)^2=$409.02