Question

Question 8 1 pts An annuity pays $1,000 per year for five years. Using an 8% discount rate, what is the difference in present values between an Ordinary Annuity and an Annuity Due? O $97 $319 $184 $233

Answer 1

Annuity Amount : $ 1,000 for the time period of 5 year

Rate of discount : 8%

Present Value of ordinary annuity: $ 1,000 * PVAF @ 8%, 5 year

Present Value of ordinary annuity: $ 1,000 * 3.993

Present Value of ordinary annuity: $ 3,993

(Note: Ordinary annuity is the annuity at which the same amount is paid/received at the end of every year/period.)

Present Value of annuity due : $ 1,000 * ( 1 + PVAF @ 8%, 4 year)

Present Value of annuity due : $ 1,000 * 4.312

Present Value of annuity due : $ 4,312

(Note : Annuity due is the annuity at which the same amount is paid/received at the beginging of every year/period.)

(Note : For calculating the present value of Annuity due, we calculate the PVAF of N-1 year because first payment had just received at time 0 and add one for the current years payment. In our question, the time period is 5 years, therefore we had calculated the 5-1=4 years PVAF and added 1)

Difference between both annuity : $ 4,312- $ 3,993 = $ 319

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