What is the pv of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?
Answers
The present value the questions ordinary annuity will be calculated using PVIFA as follows;
P
V
=
P
V
I
F
A
∗
A
m
o
u
n
t
P
V
I
F
A
=
1
−
(
1
+
r
)
−
n
r
Where;
PV is the present value
PVIFA is the present value interest factor of an annuity
r is the discount rate
n is the investment timeframe
P
V
=
1
−
(
1
+
0.055
)
−
10
0.055
∗
2
,
700
A
n
s
=
20
,
351.59
Become a
c
Present Value of 10 payments of $2700 each
Explanation:
*Note:It has been assumed that the 10 payments of $2700 each will be made on yearly basis.
Present Value can be calculated as follows:
Present Value =
where,
n = No. of years
r = Rate of Interest
Statement Showing Present Value
No. of Years Payments($) Discounting factor Present Value
1 2700 0.947 2559.24
2 2700 0.898 2424.6
3 2700 0.851 2297.7
4 2700 0.807 2178.9
5 2700 0.765 2065.5
6 2700 0.725 1957.5
7 2700 0.687 1854.9
8 2700 0.651 1757.7
9 2700 0.617 1665.9
10 2700 0.585 1579.5
27000 20,314.144
Therefore,The Present Value of the given payments should be $20,314.144.