MBA Math Sample Exercise

Finance: Constant Annuity Present Value

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Exercise

What is the present value of an annuity in which $300 is paid each year for 4 years, assuming a discount rate of 8% and the first payment is received one year from now?

Solution

Solution Commentary

(3:57)

Variable Assignments

Present Value PV = ?
Payment PMT = 300
Discount Rate r = 0.08
Years n = 4

Cash Flow

By convention for charting, Present Values are depicted as negative, reflecting an initial investment outflow in return for future cash inflows.

Manual Solution

PV = (PMT/r)[1-(1/(1+r)ⁿ)]

PV = (300/0.08)[1-(1/(1+0.08)⁴)]

PV = 3,750.00*[1-(1/1.08⁴)]

PV = 3,750.00*[1-0.74]

PV = 993.64

Excel Solution

Financial Calculator Solution

300	[PMT]
8	[i]
4	[n]
HIT [PV] TO SOLVE…	-993.64

Peter Regan teaches decision science courses at Dartmouth’s Tuck School and Duke’s Fuqua School. He also teaches pre-term quantitative skills courses at Tuck and Cornell’s Johnson School. He created the MBA Math self-paced, online pre-MBA quantitative skills course covering finance, accounting, economics, statistics, and spreadsheets.