Question

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%? Select one: a. $9,428 b. $10,446 c. $8,509 d. $8,957

Answer 1

Answer:

The correct answer is B.

Explanation:

Giving the following information:

Cash flow= $2,250

n= 4

i= 5%

Additional investment= $3,000

First, we need to calculate the future value using the following formula:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

FV= {2,250*[(1.05^4) - 1]} / 0.05

FV= 9,697.78 + 3,000

FV= $12,697.78

Now, the present value:

PV= FV/(1+i)^n

PV= 12,697.78/(1.05^4)

PV= $10,446.5