A project will generate $20,000 a year at the end of Years 3 to 6 inclusive. The discount rate is 10%. Annuity factors at 10% (to 3 decimal places) are 1.736 for Years 1-2 and 4.355 for Years 1-6. Using these annuity factors, what is the present value of these cash flows?

Correct answer: D) $52,380

Explanation

The annuity factor for Years 3-6 = factor for Years 1-6 - factor for Years 1-2 = 4.355 - 1.736 = 2.619. PV = 20,000 x 2.619 = $52,380 (using the 3-decimal factors given). Using the 4-year factor at 10% (3.170) ignores the delay and gives $63,400. Discounting the 4-year annuity back 3 years instead of 2 (3.170 x 0.751 = 2.381) gives $47,613.