Question

You will receive annual payments of $800 at the end of each year for 12 years. The first payment will be received in Year 3. What is the present value of these payments if the discount rate is 7 percent?

a. $5,465.20
b. $6,018.52
c. $6,299.80
d. $5,549.96
e. $6,856.60

Answer 1

Answer:

Option (d) $5,549.96

Explanation:

Data provided in the question:

Annual payments = $800

Time, n = 12 years

Discount rate, r = 7% = 0.07

Now,

PV2 = Annual payments × ((1 - (1 + r)⁻ⁿ)) ÷ r ) × (1 + r)

=  $800 × ( (1 - ( 1 + 0.07)¹²)) ÷ 0.07) × (1 + 0.07)

PV2 = $6,354.15

Therefore,

Present value today = PV2 ÷ (1 + r )²

= $6,354.15 ÷ (1 + .07)²

or

= $5,549.96

Hence,

Option (d) $5,549.96