What is the present value of an annuity due that pays $2,000 per year for 4 years, assuming the actual discount rate is 7 percent? Select one: O a

Finance Jan 24, 2021

What is the present value of an annuity due that pays $2,000 per year for 4 years, assuming the actual discount rate is 7 percent? Select one: O a. $7248.63 O b. $7258.63 O c. $7249 O d. $7348.63 O e. $7200.63

Expert Solution

The correct answer is a. $ 7248.63

Calculation:

PV of annuity 1 = $ 2,000 (since it is payable immediately - annuity due is payable at the beginning of every period)

PV of annuity 2 = $ 2,000 / 1.07 = $ 1869.16 (since it is payable 1 year from now)

PV of annuity 3 = $ 2,000 / 1.07 ^ 2 = $ 1746.87 (since it is payable 2 years from now)

PV of annuity 4 = $ 2,000 / 1.07 ^ 3 = $ 1632.60 (since it is payable 3 years from now)

Sum of PV of all the annuities = $ 7248.63

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