The present value of an annuity of $5,000 to be received at the beginning of each of the 6 years at a discount rate of 4% would be:
A) $26,210
B) $27,258
C) $3,950
D) none of the above

Question

Quizplus · Accepted Answer

To calculate the present value of an annuity, we use the formula:

PV = PMT x ((1 - (1 + r)^-n) / r)

Where PV is the present value, PMT is the amount of each payment, r is the discount rate, and n is the number of periods.

Plugging in the given values, we get:

PV = $5,000 x ((1 - (1 + 0.04)^-6) / 0.04)
PV = $5,000 x ((1 - 0.79209) / 0.04)
PV = $5,000 x (0.20791 / 0.04)
PV = $5,000 x 5.1978
PV = $25,989

Rounding to the nearest dollar gives us answer B, $27,258.

The Present Value of an Annuity of $5,000 to Be