The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate.By approximately how much would the value change if these were annuities due?
A) An increase of $10
B) An increase of $61
C) An increase of $100
D) Unknown without knowing number of payments

Question

Quizplus · Accepted Answer

The value of an annuity due is higher than the value of a regular annuity by one period's payment. Therefore, multiplying the value of the regular annuity by (1 + r), where r is the interest rate per period, would give the value of the annuity due. In this case, the interest rate is 10%, and the period is 1 year, so (1 + 10%) = 1.1. Thus, the value of the annuity due would be $675.40. The difference between this value and the value of the regular annuity ($614) is $61.40, which is approximately equal to $61. Therefore, the answer is B, an increase of $61.

The Present Value of an Annuity Stream of $100 Per