Question

Assume that you can receive $500,000, $515,000, and $600,000 over a 3 year period and the present value of those sums at 8% is $1,495,370. Explain what that means in simple terms.
Please show me how to calculate and get $1,495,370. My results is 1,380,791.80, different with 1495370.

Answer 1

Answer:

present value = $500,000/1.08 + $515,000/1.08² + $600,000/1.08³ = $1,380,791.80

you calculated the present value correctly, assuming that you receive the annual payments at the end of each year (ordinary annuity).

but if you receive the annual payment at the beginning of the year (annuity due) = $500,000 + $515,000/1.08 + $600,000/1.08² = $1,493,255

it's not exactly the same value, but it is much closer and you could assume that the difference is due to rounding: ($1,493,255 - $1,495,370) / $1,495,370 = -0.1%