Your grandmother has promised to give you $2,000 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 8%, which of the following is correct for determining the present value of the gift?

Question

Quizplus · Accepted Answer

The present value of an annuity formula should be used to calculate the present value of the gift since it involves a series of payments (in this case, $2,000 per year) over a specific period of time (four years) at a given interest rate (8%). Therefore, the correct formula to use is PV = $2,000 × (Annuity PV factor, i = 8%, n = 4). Choice A is incorrect because it only calculates the interest earned, not the present value of the gift. Choice B uses an incorrect interest rate and does not account for the fact that there are multiple payments. Choice C is incorrect because it calculates the future value of the gift, not the present value.

Your Grandmother Has Promised to Give You $2,000 a Year