Homework Answers
| Market rate | Initial cash proceeds | PV Factor | Amount of annual payment | |||
| (a) | 4.00% | $ 430,000 | / | 4.4518 | = | $ 96,590.14 |
| (b) | 6.00% | $ 430,000 | / | 4.2124 | = | $ 102,079.57 |
| (c) | 8.00% | $ 430,000 | / | 3.9927 | = | $ 107,696.55 |
- The present value of annual payments should equal the initial proceeds from the loan.
- $430,000 is the present value of annual payments, i.e. present value of annuity.
- Present value of annuity = Annuity × PVAF
- i.e. Annuity = Present value of annuity ÷ PVAF
- PVAF = Present value of annuity factor.
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