Page 120 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Chapter 7

Question 10

Discounting annuities

Calculate the present value of an annuity that pays out $6,000 per year starting
in 1 year’s time for 15 years if the discount rate is 7%.

Annuity factor for 15 years at 7% = (1 – (1 + 0.07) –15 )/0.07 = 9.107914

Present value = cash flow × annuity factor

Present value = $6,000 × 9.107914 = $54,647

Question 11

Annuities using tables

Calculate the present values of an annuity that pays out $6,000 per year
starting in 1 year’s time for 15 years if the discount rate is 7%.

Annuity factor for 15 years at 7% from tables is 9.108

Present value = cash flow × annuity factor

Present value = $6,000 × 9.108 = $54,648

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