Garretson Corporation will receive £15,000 today (January 1, 2017), and also on each January 1st for the next five years (2018 - 2022). What is the present value of the six £15,000 receipts, assuming a 12% interest rate?

Question

Quizplus · Accepted Answer

We can calculate the present value of each individual receipt and then add them up to find the total present value.

Using the formula for the present value of an annuity, with n = 6 (the number of payments), PMT = £15,000 (the amount of each payment), and i = 12% (the interest rate):

PV = PMT x ((1 - (1/(1+i)^n)) / i)

PV = £15,000 x ((1 - (1/(1+0.12)^6)) / 0.12)

PV = £15,000 x 4.1114

PV = £61,671.

Doing this for all six payments, we get a total present value of £69,072. Therefore, the answer is B.

Garretson Corporation Will Receive £15,000 Today (January 1, 2017), and Also