Present Value of Annuity

The present value of an annuity is the current value of a series of equal payments to be made or received in the future. The calculation of the present value of an annuity involves discounting each payment back to its present value using a discount rate.

Formula for Present Value of Annuity

The formula for calculating the present value of an annuity is as follows:

PV = A x [(1 - (1 + r)^-n) / r]

Where:
PV = Present Value
A = Annuity Payment
r = Discount Rate
n = Number of Periods

Calculation of Present Value of Annuity of 25000

Given:
Annuity Payment (A) = 25000
Number of Periods (n) = 10 years
Discount Rate (r) = 6%

Using the formula above, we can calculate the present value of the annuity as follows:

PV = 25000 x [(1 - (1 + 0.06)^-10) / 0.06]
PV = 25000 x [(1 - 0.55839) / 0.06]
PV = 25000 x 9.4253
PV = 235632.50

Therefore, the present value of the annuity of 25000 to be received after 10 years at 6% compounded annually is 235632.50.

Explanation

The calculation of the present value of an annuity involves discounting each payment back to its present value using a discount rate. The discount rate is the rate of return that could be earned on an investment with similar risk.

In this case, the annuity payment of 25000 is to be received after 10 years at 6% compounded annually. To calculate the present value of the annuity, we need to discount each payment back to its present value using a discount rate of 6%.

The formula for the present value of an annuity is used to calculate the present value of the annuity payment of 25000 over a period of 10 years. The formula takes into account the annuity payment, the number of periods, and the discount rate.

By plugging in the values, we get the present value of the annuity as 235632.50. This means that if we have 235632.50 today, we can invest it at a rate of 6% compounded annually for 10 years to receive an annuity payment of 25000 per year for the next 10 years.