Use the following scenario to answer Discussion Question 2. Jean will receive $8,500 per year for the next 15 years from her trust. If a 7% interest rate is applied, what is the current value of the future payments? Describe how you solved this problem, including which table (for example, present value and future value) was used and why.
This is a very typical "present value of an annuity" type of question
PV = Payment[1 - (1+i)-n]/i
= 8500([1 - 1.07^-15)/.07
my calculator gave me $77417.27
(are you still using tables for these kind of questions ?)
To find the current value of the future payments, we need to use the present value of an annuity formula. This formula allows us to calculate the value of a series of equal payments received over a specific period of time, given an interest rate.
In this scenario, Jean will receive $8,500 per year for the next 15 years. The interest rate is 7%. We want to find the present value of these future payments.
To solve this problem, we will use the Present Value of an Annuity of $1 table. This table provides a factor that can be multiplied by the annual payment amount to get the present value of the annuity. The interest rate and number of periods are used to locate the appropriate factor in the table.
Here are the steps to solve the problem:
1. Locate the Present Value of an Annuity of $1 table that corresponds to a 7% interest rate.
2. Look for the factor that corresponds to 15 years of payments. In this case, it will be the factor in the row labeled "n" or "number of periods" and the column labeled "i" or "interest rate." For example, if "n" is the row and "i" is the column, you would look for the intersection where "n" is 15 and "i" is 7%.
3. Once you find the appropriate factor in the table, multiply it by the annual payment amount of $8,500. This will give you the present value of the future payments.
By following these steps and using the appropriate table, you will be able to find the current value of the future payments.