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    Find the present value of the following offer?
    A 10 percent interest rate should be used.

    A trust fund would be set up for the next 8 years. At the end of that period, Dr. Wolf would receive the proceeds (and discount them back to the present at 10 percent). The trust fund called for semiannual payments for the next 8 years of $200,000 (a total of $400,000 per year).

    The payments would start immediately. Since the payments are coming at the beginning of each period instead of the end, this is an annuity due. To look up the future value of an annuity due in the table, add 1 to n (16+1) and subtract 1 from the value in the table. Assume the annual interest rate on this annuity is 10 percent annually (5 percent semiannually). Determine the present value of the trust fund's final value.

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    Solution Preview

    First calculate the future value of the trust payments made. Since this is annuity due, look at the table for FV of annuity for n=16+1=17 and r=5%, ...

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