Assume that, starting next year, you will make deposits of $514 each year into a savings...
Assume that, starting next year, you will make deposits of $514 each year into a savings account. You will make a total of 5 annual deposits. If the savings account interest rate is 13%, what is the present value of this savings plan?
Homework Answers
Present value of the savings plan
The Present Value of an Ordinary Annuity is calculated by using the following formula
Present Value of an Ordinary Annuity = P x [{1 - (1 / (1 + r) n} / r]
Annual Payment (P) = $514 per year
Annual Interest Rate (r) = 13% per year
Number of years (n) = 5 Years
Therefore, the Present Value of an Ordinary Annuity = P x [{1 - (1 / (1 + r) n} / r]
= $514 x [{1 - (1 / (1 + 0.13)5} / 0.13]
= $514 x [{1 - (1 / 1.842435)} / 0.13]
= $514 x [(1 - 0.542760) / 0.13]
= $514 x [0.457240 / 0.13]
= $514 x 3.517231
= $1,807.86
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