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Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%, or the present value of a $1,000 five-year annuity due discounted at 10%? The ordinary annuity is worth more with a present value of $3,790
Which is greater, the present value of a $1,000 five-year ordinary annuity discounted at 10%, or the present value of a $1,000 five-year annuity due discounted at 10%?
The ordinary annuity is worth more with a present value of $3,790.79.
The annuity due is worth more with a present value of $4,169.87.
The ordinary annuity is worth more with a present value of $4,169.87.
The annuity due is worth more with a present value of $4,586.85.
Expert Solution
Computation of the present value of ordinary annuity:-
PV of Ordinary Annuity = Annuity * PVAF@10%,5 years
= $1,000*3.7908
= $3,790.79
Computation of the present value of annuity due:-
PV of Annuity Due = Annuity + Annuity* ((1 - (1 + r)^-(n-1)) / r )
= $1,000 + $1,000*((1-(1+10%)^-(5-1))/10%)
= $1,000 + ($1,000*3.1699)
= $1,000 + $3,169.87
= $4,169.87
Hence, the correct option is 2). The annuity due is worth more with a present value of $4169.87
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