A financial manager invests in a five-year ordinary annuity with annual payments of 450 at 4% interest. The present value is closest to:

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Multiple Choice

A financial manager invests in a five-year ordinary annuity with annual payments of 450 at 4% interest. The present value is closest to:

The present value of an ordinary annuity is found by discounting each end-of-period payment back to today and summing those present values. Use the annuity-immediate factor: PV = PMT × [(1 − (1 + r)^−n) / r]. Here, PMT = 450, r = 0.04, n = 5. Compute: (1.04)^5 ≈ 1.2166529024, so (1.04)^−5 ≈ 0.821927. 1 − 0.821927 ≈ 0.178073. 0.178073 / 0.04 ≈ 4.451825. Multiply by 450: 450 × 4.451825 ≈ 2003.32. So the present value is about 2,003.32, which matches the given option.

The present value of an ordinary annuity is found by discounting each end-of-period payment back to today and summing those present values. Use the annuity-immediate factor: PV = PMT × [(1 − (1 + r)^−n) / r].

Here, PMT = 450, r = 0.04, n = 5. Compute:

(1.04)^5 ≈ 1.2166529024, so (1.04)^−5 ≈ 0.821927.

1 − 0.821927 ≈ 0.178073.

0.178073 / 0.04 ≈ 4.451825.

Multiply by 450: 450 × 4.451825 ≈ 2003.32.

So the present value is about 2,003.32, which matches the given option.

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