Question

An annuity pays a rate of 8 percent and has a life of 12 years. Which of these is the correct annuity discount factor for computing a present value of this annuity?

(1.08¹² - 1)/0.08

[1 - (1/1.08¹²)]/0.08

1.08¹²/0.08

(1/1.08¹²)/0.08

Answer 1

Solution

Answer- [1 - (1/1.08¹²)]/0.08

PV of annuity= Annuity amount*Annuity discount factor

PV of annuity=Annuity amount* (1 - (1/(1+r)^n))/r

where

r - discount rate or interest rate

n=number of periods

Therefore

In this case Annuity discount factor= (1 - (1/(1+.08)^12))/.08

Annuity discount factor= [1 - (1/1.08¹²)]/0.08

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