You are set to receive an annual payment of $12,500 per year for the next 12...
You are set to receive an annual payment of $12,500 per year for the next 12 years. Assume the interest rate is 7.4 percent. How much more are the payments worth if they are received at the beginning of the year rather than the end of the year?
Homework Answers
At end of year:
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$12500[1-(1.074)^-12]/0.074
=$12500*7.776090066
=$97201.13
At beginning of year:
Present value of annuity due=Present value of annuity*(1+interest rate)
=$97201.13*1.074
=$104394.01
Hence difference=$104394.01-$97201.13
=$7192.88(Approx).
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