The Jamison Corporation agrees to pay an employee $10,000 a year for five years beginning three years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit?

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Business

Jayson Harrington

11 September, 04:58

The Jamison Corporation agrees to pay an employee $10,000 a year for five years beginning three years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit?

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Rene Larsen · Answer 1

Answer : Present value of a deferred annuity

Explanation: Present value concept relates to discounting back of the expected future cash flows to determine the actual payment that should be made today.

Deferred annuity refers to the contract made with the objective of long term savings.

In the given case, the savings are made for a long period by the Jamison corporation and wants to determine how much payment should be made today so that $10,000 could be obtained five years from now.

Hence from the above we can conclude that company should use present value of deferred annuity.