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Unformatted text preview: nnuity is
similar to the method just discussed. There are long and short methods for making this calculation.
EXAMPLE Time line for present
value of an ordinary
annuity ($700 endof-year cash flows,
discounted at 8%,
over 5 years) Braden Company, a small producer of plastic toys, wants to determine the most it
should pay to purchase a particular ordinary annuity. The annuity consists of
cash flows of $700 at the end of each year for 5 years. The firm requires the
annuity to provide a minimum return of 8%. This situation is depicted on the following time line: 0 1 2 $700 $700 End of Year
$700 4 5 $700 $700 $ 648.20
Present Value $2,795.10 Table 4.2 shows the long method for finding the present value of the annuity.
This method involves finding the present value of each payment and summing
them. This procedure yields a present value of $2,795.10. CHAPTER 4 TABLE 4.2 Time Value of Money 147 The Long Method for Finding
the Present Value of an
Ordinary Annuity Year (n) Cash flow
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