Question

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Present Value of an Annuity Determine the present value of $310,000 to be received at the end of each of four years, using an interest rate of 7%, compounded annually, as follows: a. By successive computations, using the present value of $1 table in Exhibit 5. Round to the nearest whole dollar First year Second Year Third Year Fourth Year Total present value b. By using the present value of an annuity of $1 table in Exhibit 7. Round to the nearest whole dollar c. Why is the present value of the four $310,000 cash receipts less than the $1,240,000 to be received in the future? The present value is less due to over the 4 years inflation the compounding of interest deflation

Answer 1

a)

year amount factor present value

1 $310000 .9346 $289726

2 $310000 .8734 $270754

3 $310000 .8163 $253053

4 $310000 .7629 $236499

Total present value $1050032

b)

Present value annuity factor 3.3872

Present value = $310000*3.3872=$1050032

c)

Present value is less due to compounding of interest over 4 years.