Question

Denise will receive annual payments of $10,000 for the next 25 years. The discount rate is 6.8 percent. What is the difference in the present value of these payments if they are paid at the beginning of each year rather than at the end of each year

Answer 1

Answer: $8,069.29

Step-by-step explanation:

If it is paid at the beginning of the year, it accumulates an extra year of interest and would be an Annuity Due.

If it is paid at the end, it is an ordinary annuity.

Present value of annuity due = Annuity * Present value interest factor of Annuity due, 6.8%, 25 periods

= 10,000 * 12.673521

= $126,735.21

Present value of annuity = Annuity * Present value interest factor of annuity, 6.8%, 25 periods

= 10,000 * 11.866592

= $118,665.92

Difference :

= 126,735.21 - 118,665.92

= $8,069.29