You will need $12,000 at the end of each of the next four years. If an interest rate of 6% is appropriate, how much must you deposit today to receive these payments?

Question

Quizplus · Accepted Answer

The present value of an annuity is the sum of the present values of each of the individual payments. The present value of each payment is calculated by dividing the payment by (1 + r)^n, where r is the interest rate and n is the number of years until the payment is received. In this case, the present value of each payment is $12,000 / (1 + 0.06)^n, where n is 1, 2, 3, or 4. The present value of the annuity is the sum of these four present values, which is $41,581.

You Will Need $12,000 at the End of Each of the Next