The present value of an annuity is the value now of a series of equal amounts to be received (or paid out) for some specified number of periods in the future.Example: What is the present value of receiving $1,000 each year for three years at an interest of 10%, compounded annually?The present value is $2,486.90. Using the present value of an annuity table, we find the factor for 10% and 3 periods, which is 2.4869. We then multiply this factor times the annuity payments of $1,000 to arrive at a present value of $2,486.90. So, if we invest $2,486.90 today at 10% for 3 years, we can receive payments of $1,000 each of the next 3 years.Part IOn January 1, 2006, Starbucks bought some new delivery trucks. The company signed a note agreeing to pay $200,000 on December 31, 2007. The market interest rate for this note is 12%. What is the present value of this note?Part IIUsing the present value of a single amount table, we find the factor for 12% and 2 periods, which is .7972. We then multiply this factor times the future value of $200,000 to arrive at a present value of $159,440.
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