Your grandfather has promised to give you $500 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 7%, which of the following is correct for determining the present value of the gift?

Question

Quizplus · Accepted Answer

The present value of an annuity formula should be used to determine the present value of the gift, since it involves equal payments over a set number of periods. The formula is PV = PMT x [(1 - (1 / (1 + r)^n)) / r], where PMT is the annual payment ($500), r is the discount rate (7%), and n is the number of periods (4). Therefore, the correct formula to use is PV = $500 x [(1 - (1 / (1 + 0.07)^4)) / 0.07], which simplifies to PV = $1,680.72.

Your Grandfather Has Promised to Give You $500 a Year