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What is the present value of an ordinary annuity that pays 250 dollars per year

ID: 2775008 • Letter: W

Question

What is the present value of an ordinary annuity that pays 250 dollars per year for 4 years, if the appropriate discount rate is 5.0 percent per year, compounded annually?

What is the future value (at the end of 4 years) of an ordinary annuity that pays 250 dollars per year if the appropriate discount rate is 5.0 percent per year, compounded annually?

What is the present value of an ordinary annuity that pays $40 every 6 months, for 10 years, if the interest rate is 8.0 percent per year, compounded semi-annually?

What is the present value of an annuity due that pays 250 dollars per year for 4 years, if the appropriate discount rate is 5.0 percent per year, compounded annually?

If you receive $100,000 in a lump sum, how much could you withdraw each year, starting one year from today, if you wish to receive 10 payments? The interest rate is 5 1/8 percent per year, compounded annually.

Explanation / Answer

1)

Computing present value of ordinary annuity is as follows:

Year

Deposit

Interest

Cash flow

Annuity factor @5%

Discounted flows

1

250

12.5

262.5

1.8594

488

2

262.5

13.125

275.625

2.723

751

3

275.625

13.78125

289.4063

3.545

1,026

4

289.4063

14.47031

303.8766

4.329

1,315

3,580

Hence, it is $3,580.

2)

Computing future value of ordinary annuity is as follows:

Year

Deposit

Interest

Cash flow

Future Annuity factor @5%

Future cash flows

1

250

12.5

262.5

1.05

276

2

262.5

13.125

275.625

2.152

593

3

275.625

13.78125

289.4063

3.31

958

4

289.4063

14.47031

303.8766

4.525

1,375

3,202

Hence, it is $3,202.

Year

Deposit

Interest

Cash flow

Annuity factor @5%

Discounted flows

1

250

12.5

262.5

1.8594

488

2

262.5

13.125

275.625

2.723

751

3

275.625

13.78125

289.4063

3.545

1,026

4

289.4063

14.47031

303.8766

4.329

1,315

3,580

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