Determine the present value of a pension plan that will pay you 20 yearly payments of $7,000 each;the current rate of return in 7.5%
To determine the present value of a pension plan, you need to use a financial formula called the present value of an annuity. The formula for calculating the present value of an annuity is:
PV = PMT * [(1 - (1 + r)^(-n)) / r]
Where:
PV = Present Value
PMT = Amount of each payment
r = Interest rate per period
n = Number of periods
In this case, the amount of each payment (PMT) is $7,000, the interest rate (r) is 7.5%, and the number of periods (n) is 20.
Let's calculate the present value using this formula:
PV = $7,000 * [(1 - (1 + 0.075)^(-20)) / 0.075]
Calculating this equation will give us the present value of the pension plan.