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Christina will receive annuity payments of $1,200 a year for five years, with the first payment occurring at Year 4. What is the value of this annuity to her today at a discount rate of 7.25 percent

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Answer:

The annuity is worth  $3,693.99 today.

Explanation:

Giving the following information:

Cash flow= $1,200

Number of years= 5

Waiting years= 4

Discount rate= 7.25%

First, we will determine the future value:

FV= {A*[(1+i)^n-1]}/i

A= annual cash flow

FV= {1,200*[(1.0725^5) - 1]} / 0.0725

FV= $6,935.40

Now, we can calculate the present value:

PV= FV/(1+i)^n

PV= 6,935.40/ (1.0725^9)

PV= $3,693.99