Your grandfather has promised to give you $1,000 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 6%, which of the following is correct for determining the present value of the gift?

Question

Quizplus · Accepted Answer

The present value of the gift is the present value of an annuity, since it is a series of payments made at the end of each year. Therefore, we need to use the annuity present value factor with the given discount rate of 6% and the number of years (4). Choice A uses only the discount rate and the number of years, which is incorrect. Choice B uses a discount rate of 4%, which is not the given rate. Choice D uses the annuity future value factor, which is not relevant for determining the present value.

Your Grandfather Has Promised to Give You $1,000 a Year