Chapter 6, Problem 5CPA

To determine

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value. The following formula is used to calculate the present value of an amount:

$\text{Present value of an amount = }\frac{\text{Future value}}{{\left(\text{1 + interest rate}\right)}^{\text{number}\text{of}\text{periods}}}$

Annuity:

An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

To determine: The amount of lump sum payment that would be indifferent between the two alternatives.