An annual annuity-immediate pays $2000 at the end of the first year. The last payment is at the end of the 30th year. Assuming an annual effective interest rate of 6%, calculate the present value of the annuity if (a) each subsequent payment is 5% greater than the preceding payment.

An annual annuity-immediate pays $2000 at the end of the first year. The last payment is at the end of the 30th year. Assuming an annual effective interest rate of 6%, calculate the present value of the annuity if (a) each subsequent payment is 5% greater than the preceding payment.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 7P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

An annual annuity-immediate pays $2000 at the end of the first year. The last payment is at the
end of the 30th year. Assuming an annual effective interest rate of 6%, calculate the present
value of the annuity if
(a) each subsequent payment is 5% greater than the preceding payment.

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