Present Value of an Annuity

Determine the present value of $150,000 to be received at the end of each of four years, using an interest rate of 10%, 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 $150,000 cash receipts less than the $600,000 to be received in the future?

The present value is less due to

the compounding of interest

over the 4 years.

Present Value of an Annuity

On January 1 you win $2,560,000 in the state lottery. The $2,560,000 prize will be paid in equal installments of $320,000 over 8 years. The payments will be made on December 31 of each year, beginning on December 31. If the current interest rate is 5%, determine the present value of your winnings. Use the present value tables in Exhibit 7. Round to the nearest whole dollar.

$