A company enters into an agreement to make 5 annual yearend

A company enters into an agreement to make 5 annual year-end payments of $3,000 each, starting one year from now. The annual interest rate is 6%. The present value of an annuity factor for 5 periods at 6% is 4.2124. What is the present value of these five payments?

Solution

Present value of an annuity = Periodic payment x Present value of an annuity factor

Present value of annuity = $3,000 x 4.2124 = $12,637.20

The present value of the five payments is $12,637.20