Question

A company pays $100 monthly for the next 10 years and the appropriate nominal interest rate is 12%.

What is the present value of this company?

How many payments (or periods) are there? What is the periodic interest rate?

Annuity PV = $?

Answer 1

- Company pays $100 monthly for the next 10 years.

a). No of payments(or periods) = 10 years*12 (as monthly deposits)

= 120

So, No of payments are 120

b). Periodic Interest rate = Nominal Interest rate/No of compounding period in a year

= 12%/12

= 1%

So, the periodic interest rate is 1%

c). Calculating the Present Value of monthly annuity :-

Where, C= Periodic Payments = $100

r = Periodic Interest rate = 1%

n= no of periods = 120

Present Value of Annuity = $6970.05

If you need any clarification, you can ask in comments.