Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today?

Question

Quizplus · Accepted Answer

To find the present value of an ordinary annuity, we use the formula: PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the payment amount, r is the interest rate per period, and n is the total number of payments. Here, PMT = $600, r = 6%/4 = 1.5% = 0.015, and n = 4*4 = 16. Plugging these values into the formula gives the present value as approximately $8,478.76.

Nancy Billows Promised to Pay Her Son $600 Quarterly for Four