Tom is looking at an investment that will pay Tom $1,000 per year for three year

Question

Tom is looking at an investment that will pay Tom $1,000 per year for three years. Sketch out the cash flows for this investment in years 1, 2 and 3. If Tom demands a rate of return of 6% for this investment, how much should Tom invest to get it? (Use the Present Value of $1 table to solve this problem; discount each cash flow separately and add them together.) Define the term "annuity." Is Question 6 an annuity situation Solve Question 6 using the Annuity Table (Present Value of a Series of $1 Cash Flows), with interest rate of 6% for three years. Compare the results of Questions 6 and 8. Are they the same answer (Hope so!) What is the relationship between the Present Value of $1 table and the Present Value of an Annuity of $1 table? Can you fill in the following table Donna is looking at an investment that will return $3,000 per year for 3 years. Her investment goal is a 10% yield on this investment. She calculates the PV of the annuity and arrives at a PV of $7,461. Can you prove that her calculation is correct

Explanation / Answer

7 Annuity =Series of payments at fixed intervals, guaranteed for a fixed number of years . Yes, Question 6 is a annuity question

8

9 Yes, answer will be same as point no 6, if calculated with help of annuity tables

10

11. Present value of annuity for return of $3000 per year for 3 years as follows

Hence, Donna has arrived rightly for the Present value calculation.

6 Present Value = 1000*(1-(1/(1.06))^3)/0.06 = 2673 ( rounded off)

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