Question:
Assume that you borrowed $500 from a friend and promised to repay the loan in five equal annual
installments beginning one year from today. Your friend wants to be reimbursed for the time value of
money at an 8% annual rate. Explain how you would compute the required annual payment.
Answer:
The formula for computing present value of an ordinary annuity incorporating the ordinary annuity
factors from Table 4 is:
PVA = Annuity amount x Ordinary annuity factor
Solving for the annuity amount,
Annuity amount =
The annuity factor can be obtained from Table 4 at the intersection of the 8% column and 5 period row.
Assume that you borrowed $500 from a friend and promised to repay the loan in five equal annual
installments beginning one year from today. Your friend wants to be reimbursed for the time value of
money at an 8% annual rate. Explain how you would compute the required annual payment.
Answer:
The formula for computing present value of an ordinary annuity incorporating the ordinary annuity
factors from Table 4 is:
PVA = Annuity amount x Ordinary annuity factor
Solving for the annuity amount,
Annuity amount =
The annuity factor can be obtained from Table 4 at the intersection of the 8% column and 5 period row.
