Martha receives $100 on the ﬁrst of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for ﬁve years. At an 8% discount rate, what is
The difference in the present value of these two sets of payments?

Question

Quizplus · Accepted Answer

The difference arises because Martha's payments are received at the beginning of each month, making them an annuity due, while Stewart's payments are at the end of each month, making them an ordinary annuity. The present value of an annuity due is higher than that of an ordinary annuity due to the earlier receipt of payments. Calculating the present value of both and finding the difference gives approximately $32.88.

Martha Receives $100 on the ﬁRst of Each Month