Question

don draper has signed a contract that will pay him 80000 at the beginning of each year for the next 6 years plus an additional at the end of year 6 if 8% is the appropriate discount rate, what is the present value of the contract

Answer 1

Answer:

$449,830

Explanation:

A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity.

Don draper will receive total 7 payments in 6 years time.

Formula for Present value of annuity is as follow

PV of annuity = P + P x [ ( 1- ( 1+ r )^-n ) / r ]

P = Payment = $80,000

r = rate of return = 8%

n = number of years = 6 years

PV of annuity = $80,000 + $80,000 x [ ( 1 - ( 1+ 8% )^-6 ) / 8% ]

PV of annuity = $80,000 + $369,830

PV of annuity = $449,830