To compute the present value of $1,000 annuity received at the end of each of the next three years and discounted at the rate of 5% per year, you should enter the following variables into a financial calculator.
A)N=3, i=5, PMT=1000
B)N=3, i=5, FV=3000
C)N=3, i=15, PMT=1000
D)N=1, i=5, PMT=3000

Question

Quizplus · Accepted Answer

The present value of an annuity formula is used to calculate the current value of a series of equal future cash flows. In this case, we are trying to find the present value of a $1,000 annuity received at the end of each of the next three years, discounted at the rate of 5% per year. Therefore, we need to use a financial calculator to solve for this present value.

The correct variables to enter into the calculator for this problem are N=3 (for three years), i=5 (for a 5% annual discount rate), and PMT=1000 (for the $1,000 annual payment).

Choice A is the correct answer because it correctly enters those variables into the calculator. Choice B is incorrect because it uses the wrong variable FV (future value) instead of PMT. Choice C uses an incorrect discount rate (15% instead of 5%). Choice D uses only one year instead of three years, and the payment is $3,000 instead of $1,000 per year.

To Compute the Present Value of $1,000 Annuity Received at the End