TVM67 - Present Value of a Deferred Annuity

Audio Transcript

Richard has agreed to sell his business to his son. To make financing more convenient to his son, he agrees to sell the business for 7 annual payments of $6,000 each. The payments will begin 4 years from today. Assume an annual interest rate of 5.5%. What is the present value of the 7 payments?

This situation is an ordinary annuity of 7 payments deferred 3 periods.

First, the present value of an ordinary annuity:

Enter the known variables.

The payment, PMT, is -$6,000.

The rate is 5.5%.

The number of periods, NPER, is 7.

We go to the Formulas tab and look for the PV function.

We click on PMT,

We click on rate,

We click on NPER.

The present value, PV, is $34,098

For the present value of the single sum:

Enter the known variables.

The future value, FV, is -$34,098.

The rate is 5.5%.

The number of periods, NPER, is 3.

We go to the Formulas tab and look for the PV function.

We click on FV,

We click on rate,

We click on NPER.

The present value, PV, is $29,038