Consider an annuity consisting of three cash flows of $8,000 each. If the interest rate is 6%, what is the present value (today) of the annuity if the first cash flow occurs

Consider an annuity consisting of three cash flows of $8,000 each. If the interest rate is 6%, what is the present value (today) of the annuity if the first cash flow occurs:

a) Today

b) One year from today

c) Two years from today

d) Five years from today

Solutions

Expert Solution

Present value=Cash flows*Present value of discounting factor(rate%,time period)

a.Present value=8000+8000/1.06+8000/1.06^2

=$22667.14(Approx)

b.Present value=8000/1.06+8000/1.06^2+8000/1.06^3

=$21384.1(Approx)

c.Present value=8000/1.06^2+8000/1.06^3+8000/1.06^4

=$20173.68(Approx)

d.Present value=8000/1.06^5+8000/1.06^6+8000/1.06^7

=$16938.21(Approx)

jeff jeffy answered 2 years ago

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