Present value of annuity
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Using the appropriate PV Table and assuming a 12% annual interest rate, determine the present value on December 31, 2009 of a five period annual annuity of 10000 under each of the following situations:
a. The first payment is received on December 31, 2010, and interest is compounded annually.
b. The first payment is received on December 31, 2009, and interest is compounded annually.
c. The first payment is received on December 31, 2009, and interest is compounded quarterly.
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The solution explains how to calculate the present value of an annuity.
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a. The first payment is received on December 31, 2010, and interest is compounded annually.
This is an ordinary annuity. The time period is 5 years and the rate is 12%. We use the PVIFA table and get the factor for 5 periods and 12%. PVIFA (5,12%) = 3.6048
PV of annuity = 10,000 X 3.6048 = ...
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