Baxter 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)$31,329
B)$34,462
C)$37,908
D)$48,684

Question

Quizplus · Accepted Answer

The present value of an annuity is the sum of the present values of each of the individual cash flows. The present value of each cash flow is calculated by dividing the cash flow by (1 + r)^n, where r is the interest rate and n is the number of years from the present to the date of the cash flow. In this case, the interest rate is 10% and the first cash flow is to be received in 3 years, so the present value of the first cash flow is $10,000 / (1 + 0.10)^3 = $7,513.15. The present value of the second cash flow is $10,000 / (1 + 0.10)^4 = $6,830.14, and so on. The present value of all five cash flows is $7,513.15 + $6,830.14 + $6,191.03 + $5,604.57 + $5,068.14 = $31,329.03.

Baxter Desires to Purchase an Annuity on January 1,2014,that Yields