An accountant wishes to find the present value of an annuity of $1 payable at the beginning of each period at 10% for eight periods. The accountant has only one present value table which shows the present value of an annuity of $1 payable at the end of each period. To compute the present value, the accountant would use the present value factor in the 10% column for
A) seven periods.
B) eight periods and multiply by (1 + .10).
C) eight periods.
D) nine periods and multiply by (1 - .10).

Question

Quizplus · Accepted Answer

The correct approach is to use the present value factor for eight periods and then multiply by (1 + .10) because the payments are made at the beginning of each period, effectively moving the entire annuity one period forward in time, which is equivalent to multiplying by (1 + the interest rate).

An Accountant Wishes to Find the Present Value of an Annuity