Find the present value of a 5-year annuity due if the annual payments are $600 and the interest rate is 11%.How much larger is the present value of the annuity due than the present value of the ordinary 5-year annuity?
A) $243.93
B) $204.76
C) $279.22
D) $261.32
E) $227.45

Question

Quizplus · Accepted Answer

Step 1 - Calculate the present value of the annuity due.
PV = PMT × 11ea7fdb_fc1b_6300_a768_710392765da5_TB2902_11 × (1 + i)
PV = 600 × 11ea7fdb_fc1b_6301_a768_e3e006bc28ff_TB2902_11 × (1.11) = $2,461.47
Using a financial calculator:
N = 5, I/Y = 11, PMT = -600, FV = 0, cpt PV = $2,217.54
2,217.54 × 1.11 = $2,461.47
Step 2 - Calculate the value of the ordinary annuity.
PV = PMT × 11ea7fdb_fc1b_6302_a768_3b872c3eceae_TB2902_11 PV = 600 × 11ea7fdb_fc1b_6303_a768_67a32b915878_TB2902_11 = $2,217.54
Using a financial calculator:
N = 5, I/Y = 11, PMT = -600, FV = 0, cpt PV = $2,217.54
Step 3 - Take the difference between the two.
$2,461.47 - $2,217.54 = $243.93

Find the Present Value of a 5-Year Annuity Due If