Question

Present Value of an Annuity

Determine the present value of $130,000 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 $130,000 cash receipts less than the $520,000 to be received in the future?
The present value is less due to (inflation, the compounding of interest, deflation) over the 4 years.

Answer 1

a)	First year	$ 1,21,495
	Second Year	$ 1,13,547
	Third Year	$ 1,06,119
	Fourth Year	$     99,176
	Total present value	$ 4,40,337
	Note: Interest factor = 1/1.07 =	0.9346
b)	PVIFA(7,4) =	3.3872
	Total present value = 130000*3.3872)	$    4,40,337
c)	The PV is less due to compounding of interest.