find the present value of the ordinary annuity which has pay

find the present value of the ordinary annuity which has payments of $700 per year for 11 years at 5% compounded annually

Solution

The formula for the present value P of an ordinary annuity is P = p[ 1 - (1/(1+r)ⁿ ] / r where p is the periodic payment, n is the number of periods and r is the rate of interest for the period in decimals. Here, p = $700, n = 11 and r = 5/100 = 0.05. Therefore, P = 700[ 1 -(1/ 1.05)¹¹]/ (0.05) = 700(1 - 0.5846792890/ (0.05) = 700*0.41532071/0.05 = $5814.49