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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PRESENT VALUE OF AN ANNUITY Find the present values of these ordinary annuities. Discounting occurs once 4 year.

  1. a. $400 per year for 10 years at 10%
  2. b. $200 per year for 5 years at 5%
  3. c. $400 per year for 5 years at 0%
  4. d. Rework Parts a, b, and c assuming they are annuities due.

a.

Summary Introduction

To calculate: Present value of annuity at $400 per year for 10 years at 10%.

Annuity: It is an agreement under which a person pays the lump sum payment or number of small transactions and in return he gets the amount at later date or upon annuitization. The purpose of the annuity is not to the break the flow of income after retirement.

Explanation

Solution:

Formula to calculate present value of annuity is,

PVAnnuity=C×[1I1I×(1+I)N] (I)

Where,

  • PV is present value.
  • C is monthly payment made.
  • I is interest rate.
  • N is number of years.

Substitute $400 for C, 10% for I and N for 10 in equation (I).

b.

Summary Introduction

To calculate: Present value of annuity at $200 per year for 5 years at 5%.

c.

Summary Introduction

To calculate: Present value of annuity at $400 per year for 5 years at 10%.

d.

Summary Introduction

To calculate: Annuity due.

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