Financial Accounting: An Integrated Statements Approach, 2nd Edition

In the preceding case, the periodic cash flows of $6,000 are called an annuity. An annu-

ity is a series of cash payments or receipts (called annuity payments), spaced equally

in time, as illustrated in Exhibit 8.

450 Chapter 10 Liabilities

Today

$5,660.40

$5,340.00

$3,551.40

$6,000 Present Value of $1 6%,n 1 (0.94340)

$6,000 Present Value of $1 6%,n 2 (0.89000)

$6,000 Present Value of $1 6%,n 9 (0.59190)

$6,000 Present Value of $1 6%,n 10 (0.55840)

$6,000

PRESENT VALUE OF A

STREAM OF CASH RECEIPTS

$3,350.40

$44,160.54

Sum of Present

Value Factors

Total Present

Value of the

Stream of

Cash Receipts

7.36009







Cash receipts of $6,000 each year.

1 year 2 years 9 years 10 years

Exhibit 7

Present Value of a

Stream of Cash Receipts

Equal Cash Payments or Receipts

Spaced Equally in Time

THE CONCEPT OF AN ANNUITY

Today 1 year 2 years 9 years 10 years

$6,000 $6,000 $6,000 $6,000

Exhibit 8

The Concept of an

Annuity

The present value calculation for an annuity can be simplified using Present Value

of an Annuity of $1tables. An excerpt of a present value of an annuity of $1 table is

shown in Exhibit 9.

For example, the present value of an annuity of $1 for 10 periods at an interest rate

of 6% we will denote as Present Value of an Annuity of $16%,n= 10, which from the table