An investment will provide you with $100 at the end of each year for the next 10
ID: 2383332 • Letter: A
Question
An investment will provide you with $100 at the end of each year for the next 10 years. What is the present value of that annuity if the discount rate is 8% annually?
What is the present value of the above if the payments are received at the beginning of each year?
If you deposit those payments into an account earning 8%, what will the future value be in 10 years?
What will the future value be if you open the account with $1,000 today, and then make the $100 deposits at the end of each year?
I need all parts answered please.
Explanation / Answer
Present Value of Cash Flows = Payment at the End of 10 Years/(1+Discount Rate)^n
present value of the cash flows = 100/(1+.08)10
= $8.5200
Future Value of an
Ordinary Annuity
(FVOA) Formula
FVOA
=
A
×
(1 + r)n - 1/r
=1000*(1+0.1)^10-1/.01=201140
Future Value of an
Ordinary Annuity
(FVOA) Formula
FVOA
=
A
×
(1 + r)n - 1/r
=1000*(1+0.08)^10-1/.08=107370
End of Year
Cash Flow
0
100
1
100
2
100
3
100
4
100
5
100
6
100
7
100
8
100
9
100
NPV
$833.34
Future Value of an
Ordinary Annuity
(FVOA) Formula
FVOA
=
A
×
(1 + r)n - 1/r
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