You are thinking of purchasing an annuity with annual payments of $400. However, unlike previous annuities...

You are thinking of purchasing an annuity with annual payments of $400. However, unlike previous annuities you’ve seen, this one pays the initial payment of $400 today (not important, but the technical term for this is an annuity due). The annuity pays a total of 12 payments. If the discount rate is 6%, what is the present value of the product?

Expert Solution

The respective Payments, their discounting factors and the resultant present value of all the future payments can be tabulated below:

Discounting factor can be calculated as:

DF=1/(1+R/100)ⁿ

while present value of the payment is calculated as PV=P x DF, where P is the payment received

Thus, Present value of the product = sum of present values of all payments = $ 3554.75 (approx.)

jeff jeffy answered 3 months ago

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