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Math Help - Present value annuity

  1. #1
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    Present value annuity

    You have two options 1) to receive 300 at Y/E for ever
    or
    2) receive 400 at Y/E for 25 years

    market interest rate is 6%

    how do i find the present values?
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  2. #2
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    Hello, entrepreneurforum.co.uk!

    You have two options
    1) to receive 300 at Y/E forever
    or
    2) receive 400 at Y/E for 25 years

    Market interest rate is 6%

    How do i find the present values?
    Option 1

    To receive $300 annually forever, the annual interest must be $300.

    If P is the present value, the interest for one year is . 6\%\times P

    . . We have: . 0.06P \:=\:300 \quad\Rightarrow\quad P \:=\:\$5000



    Option 2

    To receive $400 annually for 25 years, use the formula: . P \:=\:A\,\frac{r(1+r)^n}{(1+r)^n-1}

    . . where: . \begin{Bmatrix}P &=& \text{Present value} \\ r &=& \text{Periodic interest rate} \\ n &=& \text{Number of periods} \\ A &=& \text{Periodic payment} \end{Bmatrix}


    We have: . P \;=\;400\,\frac{(0.06)(1.06^{25})}{1.06^{25}-1} \;=\;5133.342463 \;\approx\;\$5113.34

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  3. #3
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    Punjab, Pakistan
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    Find PV with FinanceEasy

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    Asad
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