# How do I calculate the Present Value of a Deferred Annuity?

• Mar 30th 2010, 12:07 PM
system32
How do I calculate the Present Value of a Deferred Annuity?
I am having a little trouble calculating the Present Value of a deferred Annuity. This is the question I have from my book:

What price will a finance company pay to a merchant for a conditional sale contract that requires 15 monthly payments of \$231 beginning in six months? The finance company requires a rate of return of 18% compounded monthly.

How would I calculate this? The answer to the question is: \$2861.16, but I keep getting a different answer.

Thanks
• Mar 30th 2010, 01:32 PM
Wilmer
Quote:

Originally Posted by system32
I am having a little trouble calculating the Present Value of a deferred Annuity. This is the question I have from my book:

What price will a finance company pay to a merchant for a conditional sale contract that requires 15 monthly payments of \$231 beginning in six months? The finance company requires a rate of return of 18% compounded monthly.

How would I calculate this? The answer to the question is: \$2861.16, but I keep getting a different answer.

1: get present value of the 231 payments; that'll be as at 5 months from now
2: get present value of results; that'll be as at now, or 2861.16

In other words, the 2861.16 accumulates for the 1st 5 months,
then the accumulated amount receives payments of 231
beginning in 6th month...OK?
• Mar 30th 2010, 05:22 PM
Wilmer
This is what it'll look like.
Code:

```Year  Payment  Interest    Balance  0                          2861.16  1              42.92      2904.08  2              43.56      2947.64  3              44.21      2991.85  4              44.88      3036.73  5              45.55      3082.28  6  -231.00    46.24      2897.52  ..... 19  -231.00      6.78        227.58 20  -231.00      3.42          .00```