A financial contract offers to pay €1,200 per month for five years with the first payment made today. Assuming an annual discount rate of 6.5%, compounded monthly, the present value of the contract is closest to:
B is correct. Enter the following into a financial calculator: number of periods (5 × 12), N = 60; the discount rate, I/Y = (6.5/12) = 0.54166667; payment, PMT =1,200.
Calculate the present value, PV, using “Begin” mode because this is an annuity due (the first payment is to be made immediately). The solution is 61,662.62.
Two alternate approaches are also available.
1) Find the PV of an ordinary annuity of 59 periods (60,462.62) and add 1,200 (the time zero first payment) to that value.
2) Find the PV of a 60-period ordinary annuity and multiply that value by one plus the monthly periodic interest rate (1.0054166667).