Q20RQ - Horngren'S Financial And Managerial Accounting

Question

How is the present value of an annuity determined?

Step-by-Step Solution

Answer

$\text{P}=\text{PMT}\times \frac{1-\left(\frac{1}{{\left(1+\text{r}\right)}^{\text{n}}}\right)}{\text{r}}$

Step 1: Meaning of Annuity

An annuity is the payment of a fixed amountat uniform intervalsto an individual.

Step 2: Determination of the present value of an annuity

Following is the formula which determines the present value of an annuity:

$\text{P}=\text{PMT}\times \frac{1-\left(\frac{1}{{\left(1+\text{r}\right)}^{\text{n}}}\right)}{\text{r}}$

Where,

P = periodic payment

r = rate per period

n = number of period