11170-6-7P AID: 8739 | 01/11/2020

Present Value

The future value of today’s amount which is discounted at a specific interest rate to
disclose its current worth is called as present value.

(1)

Calculate the required annual payment when interest rate is 10% and 4 payments
are to be made.

The required annual payment when interest rate is 10% and 4 payments are to be made is
calculated by dividing the present value of annuity with the present value of an annuity
due as shown below:

Note: PV factor (Present value of an ordinary annuity of $1: n = 4, i =10%) is taken from
the table value (Table 4 in Appendix from textbook).

Thus, the required annual payment when interest rate is 10% and 4 payments are to be
made is $78,868.

(2)

Calculate the required annual payment when interest rate is 8% and 5 payments
are to be made.

The required annual payment when interest rate is 8% and 5 payments are to be made is
calculated by dividing the present value of annuity with the present value of an annuity
due as shown below:

Note: PV factor (Present value of an ordinary annuity of $1: n = 5, i =8%) is taken from
the table value (Table 4 in Appendix from textbook).

Thus, the required annual payment when interest rate is 10% and 4 payments are to be
made is $62,614.

(3)

Determine the number of annual payments would be required to repay the debt.

In order to determine the number of annual payments would be required to repay the
debt, the first step is to calculate the present value of annuity factor for the given interest
rate of 8% as shown below:

Note: PV factor (Present value of an ordinary annuity of $1: n = 5, i =8%) is taken from
the table value (Table 4 in Appendix from textbook).

To determine the number of payments, refer to the table 4 (Present value of an ordinary
annuity of $1) of appendix. The present value of an ordinary annuity 4.86845 is to be
compared to interest rate 10%. When compared, the number of years is 7 Payments.

(4)

Determine the interest rate that bank will be charging L when 3 payments are
made.

The interest rate that bank will be charging L when 3 payments are made is determined
by looking the present value annuity factor in the annuity table. The present value of
annuity of $1 is calculated as shown below:
Note: PV factor (Present value of an ordinary annuity of $1: n = 3, i =12%) is taken from
the table value (Table 4 in Appendix from textbook).

To determine the interest rate refer to the table 4 (Present value of an ordinary annuity of
$1) in appendix. The present value of an ordinary annuity 2.40184 is to be compared to
number of payments (3). When compared, the interest rate is 12%.