Answer to Question #136534 in Financial Math for Wachira Ann Wangari

Question

Consider an annuity of payments of $1000 at the end of every second year. What is the present value of this annuity if it runs for ten years and the interest rate is 7%?

Answer 1

PV of Ordinary Annuity = C * {1-(1+i)^-n/i}

Effective interest rate at the end of every 2 years= (1+0.07)²-1= 0.14

Substitute the values in the formula C= $ 10,000

i= 14%

n= 10/2= 5

PV = $10,000 * { 1-(1+0.14)^-5/ 0.14}

= $10,000 * 3.432

= $34,320