Question

If your grandmother’s estate will pay you $280 a year for 7 years, at an interest rate of 6%, what will the present value of these payments?

Answer 1

Present Value of these payments				=	Annual payment * Present value of annuity of 1
				=	$     280.00	*	5.582381
				=	$ 1,563.07
Working:
Present value of annuity of 1				=	(1-(1+i)^-n)/i			Where,
				=	(1-(1+0.06)^-7)/0.06			i	6%
				=	5.5823814			n	7
Note:
Assuming payments are made at the end of year.
If these payments are made at the beginning of the year the,
Present Value of these payments				=	Annual payment * Present value of annuity of 1
				=	$     280.00	*	5.917324
				=	$ 1,656.85
Working:
Present value of annuity of 1				=	((1-(1+i)^-n)/i)*(1+i)			Where,
				=	((1-(1+0.06)^-7)/0.06)*(1+0.06)			i	6%
				=	5.9173243			n	7