Question

Plimpton has an annuity due that pays​ $800 per year for 11 years. What is the present value of the cash flows if they are discounted at an annual rate of​ 7.50%?

Answer 1

Answer:

6291.26$

Explanation:

In order to calculate the present value of the cash flow, we apply the formula for the present value of annuity due:

$PVA=P+\frac{P}{r}(1-\frac{1}{(1+r)^{n-1}})$

where:

P is the value of the periodic payment

r is the discout rate

n is the number of periods

In this problem, we have:

$P=\ 800$ (periodic payment)

n = 11 y (number of years)

$r=0.075$ (discount rate is 7.5%)

Therefore, the present value of the cash flow is:

$PVA=800+\frac{800}{0.075}(1-\frac{1}{(1+0.075)^{11-1}})=6291.26$