Your company will generate $66,000 in annual revenue each year for the next seven years from a new information database.

If the appropriate interest rate is 8.50 percent, what is the present value of the savings? (Do not round intermediate calculations and round your final answer to 2 decimal places, e. g., 32.16.)

Present Value of savings = $33,7842.35

Explanation:

An annuity: A series of equal amount receivable or payable in the future for certain number of years is called an annuity. There are two (2) types of annuity due and ordinary annuity.

The present value of an annuity is the amount that needs to be invested today to generate a series of equal annual cash flows in the future.

The concept of present value is based on idea that $1 today is not the same as $1 tomorrow as the former can be invested to earn interest making it higher than the later. This called the time value of money.

To calculate the present value (PV) of an annuity, we discount the series of future cash flows by a required rate of return called the discount rate. The discount rate in this question is 8.50%.

Using the formula below we can can calculate the present value (PV):

PV = A * (1 - ((1+r) ^ (-n)) / r)

where - PV - Present value, A - annual cash flow, n - number of years, r - interest rate

= 66,000 * (1 - (1 + 0.085) ^ (-7)) / 0.085)

=66,000 * 5.1188

Present Value = $33,7842.35