Question

If you receive $300 at the end of each year for 10 years plus a lump sum of $2,000 at the end of year 10, what is the present value of these receipts? Assume an interest rate of 5%.

Answer 1

Present Value of receipts = annual receipts * PVAF ( years, Yield) + Redeemable value * PVF (Yrs,Yield)

So Present Value = 300* PVAF (10 yrs, 5%) + 2000* PVF (10 yrs,5%)

$\Rightarrow$ (300 * 7.722) +( 2000 * 0.614)

$\Rightarrow$$ 3544.60

Working Notes: yield means expected rate of interest which is 5% in question.

Maturity value = 2000 as given in question

Life = 10 years

there is also an alternate formula through which we can also solve above problem.

Formula is: present value of receipts = {annual receipts / ( 1+ annual yield rate ) year of receipt} + .......+{ Redemption amount / (1+annual yield rate ) year of receipt}