Your grandmother has promised to give you $2,000 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 8%,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 can be used to calculate the present value of the gift, because the grandmother is promising to give $2,000 at the end of each year in the next four years. The formula is PV = PMT x [(1 - (1/(1+i)^n))/i], where PMT is the annual payment, i is the interest rate, and n is the number of years. Using a discount rate of 8%, the present value of the gift is calculated as PV = $2,000 x [(1 - (1/(1+0.08)^4))/0.08] = $6,634.16. Therefore, choice D is the correct answer.

Your Grandmother Has Promised to Give You $2,000 a Year