Homework Help: calculating annuity

Posted by Ms. Renee on Tuesday, July 11, 2006 at 11:49pm.

IF a company will generate 80,000 in annual revenue each year for the next eight years and the interest rate is 8.2% what is the present value of the savings?

An EXCEL spreadsheet will be helpful for these types of calculations.

Let S1 be savings in year 1, S2 in year 2, and so on. (For now, unless you have been othewise instructed, assume annual savings is received on the last day of the year.) Let r be the interest rate.

First, calculate the nominal amount of cash that will be there after 8 years.
T = S1*(1+r)^7 + S2*(1+r)^6 ... S8(1+r)^0
Now deflate T by 8 years of annual discounting at rate d. PV = T/(1+d)^8 Since you did'nt specifiy a discount rate d, assume d=r.

Thanks! That is much easier!

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