Joshua desires to purchase an annuity on January 1, 2014, that yields him five annual cash flows of $10,000 each, with the first cash flow to be received on January 1, 2017. The interest rate is 10% compounded annually. The cost present value) of the annuity on January 1, 2014, is
A) $31,328.81.
B) $34,461.70.
C) $37,907.87.
D) $48,684.19.

Question

Quizplus · Accepted Answer

The present value of the annuity is calculated by discounting each of the $10,000 cash flows back to January 1, 2014, using the 10% interest rate. The first cash flow occurs on January 1, 2017, which is 3 years from January 1, 2014. The present value of the annuity is $31,328.81.

Joshua Desires to Purchase an Annuity on January 1, 2014