Question

5) Which of the following amounts is closest to the present value of payments of £60,000 at the end of each of the next three years if the appropriate interest rate is 6%? a) £54,546 b) £59,940 c) £160,380 d) £163,632 e) £180,000

Answer 1

The amount paid at the end of each year is 60,000

The number of years to be paid is 3 years

Interest rate is 6%

Present value factor for year 1 @6% is 1/1.06 =0.943396226

Present value factor for year 2 @6% is 0.943396226/1.06 =0.88999644

Present value factor for year 3 @6% is 0.88999644/1.06 =0.839619283

Total value of 3 years is 0.943396226+0.88999644+.0839619283=2.673011949

The Present value of 60,000 paid at the end of each year for a period of 3 years is 60000*2.673011949

=160380.717

so The amount closest to Present value of payments of 60,000 at the end of the each year is 160380

so the answer is c)160,380