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Math Help - How do I calculate the Present Value of a Deferred Annuity?

  1. #1
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    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.

    Please help.
    Thanks
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  2. #2
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    Quote Originally Posted by system32 View Post
    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?
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  3. #3
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    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
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