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You are comparing two annuities with equal present values. The applicable discount rate is 6.5 percent....

You are comparing two annuities with equal present values. The applicable discount rate is 6.5 percent. One annuity will pay $2,000 annually, starting today, for 20 years. The second annuity will pay annually, starting one year from today, for 20 years. What is the annual payment for the second annuity?

Select one:

A. $2,075

B. $2,130

C. $2,000

D. $2,225

E. $2,405

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Answer #1

For first annuity:

Present value of annuity due=(1+interest rate)*Annuity[1-(1+interest rate)^-time period]/rate

=1.065*$2000[1-(1.065)^-20]/0.065

=$2000*11.73471022

=$23469.42044

For second annuity:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

$23469.42044=Annuity[1-(1.065)^-20]/0.065

$23469.42044=Annuity*11.01850725

Annuity=$23469.42044/11.01850725

which is equal to

=$2130

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