C | courses,apliacom/at 15099378 15743, You have the opportunity to invest in se
ID: 2564059 • Letter: C
Question
C | courses,apliacom/at 15099378 15743, You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV)? Assume that all annuities earn the same positive interest rate. O An annuity that pays $1,000 at the end of each year O An annuity that pays $500 at the beginning of every six months O An annuity that pays $500 at the end of every six months O An annuity that pays $1,000 at the beginning of each year An ordinary annuity selling at $10,362.11 today promises to make equal payments at the end of each year for the next 12 years (N). If the annuity's appropriate interest rate (1) remains at 8.00% during this time, the annual an payment (PMT) will be You just won the lottery. Congratulations! The jackpot is $85,000,000, paid in 12 equal annual payments. The fir payment on the lottery jackpot will be made today. In present value terms, you really won assuming annual interest rate of 8.00%. Session Timeout 0 4e@e Type here to searchExplanation / Answer
Assume that the interest rate is 10%.
Calculate the present value of an annuity of $1,000 per year for 10 years when the annuity is paid at the end of the period.
Present value = $1,000 x PVIFA (10%, 10) = $1,000 x 6.145 = $6,145
Now calculate the present value of an annuity of $1,000 per year for 10 years when the annuity is paid at the beginning of the period.
Present value = $1,000 x PVAD (10%, 10) = $1,000 x 6.759 = $6,759
From the above calculations, it can be clearly observed that the present value of an annuity that pays $1,000 at the beginning of each year is greater than the present value of an annuity that pays $1,000 at the end of each year.
Therefore,
An annuity that pays $1,000 at the beginning of each year has the greatest present value.
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