Assume an annuity will pay $1,000 a year for five years with the first payment occurring in Year 4,that is,four years from today.When you compute the present value of that annuity using the PV formula,the PV will be as of which point in time?

Question

Quizplus · Accepted Answer

The present value formula discounts future cash flows back to a present value as of a specific point in time. In this case, since the first payment occurs in Year 4, we need to discount the cash flows back to a present value as of Year 3, one year prior to the first payment. Therefore, the correct option is C, Year 3.

Assume an Annuity Will Pay $1,000 a Year for Five