Chapter 4, Problem 15PROB

Summary Introduction

The annual cash flows for year 1 is $500; year 2 is $400; and year 3 is $300. The opportunity cost is 7.5%.

Present value of an annuity is the current value of future payment or the present value of a series of future periodic payments made at the end of each payment period.

$PV=\frac{PM{T}_1}{{\left(1+r\right)}^1}+\frac{PM{T}_2}{{\left(1+r\right)}^2}+\frac{PM{T}_3}{{\left(1+r\right)}^3}$

Present value of an annuity due is the current value of future payment or the present value of a series of future periodic payments made at the beginning of each payment period.

$PV=\frac{PM{T}_1}{{\left(1+r\right)}^0}+\frac{PM{T}_2}{{\left(1+r\right)}^1}+\frac{PM{T}_3}{{\left(1+r\right)}^2}$

Here,

The present value is “PV”.

The annual payment on investment is “PMT”.

The interest rate is “r”.