Summary Business Accounting

Question:

Using the appropriate present value table and assuming a 12% annual interest rate, determine the present

value on December 31, 2013, of a five-period annual annuity of $5,000 under each of the following

situations:

1. The first payment is received on December 31, 2014, and interest is compounded annually.

2. The first payment is received on December 31, 2013, and interest is compounded annually.

3. The first payment is received on December 31, 2014, and interest is compounded quarterly



Answer:



1. PVA = $5,000 (3.60478) = $18,024

Present value of an ordinary annuity of $1: n = 5, i = 12% (from Table 4)



2. PVAD = $5,000 (4.03735) = $20,187

Present value of an annuity due of $1: n = 5, i =12% (from Table 6)



3. PV of $1

Payment i = 3% PV n

First payment: $5,000 x .88849 = $ 4,442 4

Second payment 5,000 x .78941 = 3,947 8

Third payment 5,000 x .70138 = 3,507 12

Fourth payment 5,000 x .62317 = 3,116 16

Fifth payment 5,000 x .55368 = 2,768 20

Total $17,780