Finance Problem - Compound Interest ?

Question

Company has to pay $300,000 at the beginning of every year over the next 5 years into a compensation fund.

Assume the first payment will be made at the beginning of year 1 and the that compensation fund will earn a return of 8%pa, interest compounded annually.

The total dollar value of the company's liability is closest too:

a. 1,197,813

b. 1,293,638

c. 1,938,964

d. 2,035,912

Answer 1

Refer to the Present Value of an Ordinary Annuity of $1 table at the link. Look at the 8% column, and at the 5 periods row, and where they meet, you'll find the multiplier is 3.99271. $300,000 x 3.99271 = $1,197,813 - Answer (a).

Answer 2

The problem cannot be answered without taking into account the timing of the requested valuation.  The net present value of the payments is about $1.3 million; the future value (after five years) is about $1.9 million.  Exact figures can be had with a financial calculator, such as the HP 12-C.