Find the present value of an immediate annuity of Rs 500 per year for 10 year at 3%p.a.?

Question

Answer

Calculation of Present Value of Immediate Annuity

An immediate annuity is a financial instrument that provides a regular stream of income for a specified period. To calculate the present value of an immediate annuity, we need to use the following formula:

Present Value = Payment x (1 - (1 + r)^-n) / r

Payment: The amount of money received each year. In this case, the payment is Rs 500 per year.

r: The discount rate or the rate of return on an investment. In this case, the discount rate is 3% per annum.

n: The number of years for which the payments will be received. In this case, the payments will be received for 10 years.

Calculation:

Substituting the values in the formula, we get:

Present Value = Rs 500 x (1 - (1 + 0.03)^-10) / 0.03

Present Value = Rs 4,288.81

Interpretation:

The present value of the immediate annuity is Rs 4,288.81. This means that if you invest Rs 4,288.81 today at a discount rate of 3% per annum, you will be able to receive Rs 500 per year for the next 10 years.

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