Robert wants to have $2,300 at the END of every three months for 8 years. The bank pays 8% interest, compounded quarterly. Robert calculates that the present value of the ordinary annuity is $53,977.16. What would be the present value if payments were to be received at the BEGINNING of every period rather than the END? (Use Table 12-2 from your text)
A) $52,016.20
B) $55,056.71
C) $55,344.83
D) $55,986.21

Question

Quizplus · Accepted Answer

The present value of an annuity due (payments at the beginning of each period) is higher than the present value of an ordinary annuity (payments at the end of each period) because each payment is received one period sooner, thus having one extra period to earn interest. To find the present value of an annuity due, you can multiply the present value of the ordinary annuity by (1 + i), where i is the periodic interest rate (8% annual rate compounded quarterly gives a periodic rate of 2%). Therefore, $53,977.16 * (1 + 0.02) = $55,056.71.

Robert Wants to Have $2,300 at the END of Every