Which is greater,the present value of a five-year ordinary annuity of $300 discounted at 10%,or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?
A)The first annuity because the cash flows occur sooner.
B)The second annuity because the cash flows are discounted at a 0% interest rate.
C)The two annuities are of equal value.
D)The answer to this question cannot be determined.

Question

Quizplus · Accepted Answer

The present value of a five-year ordinary annuity of $300 discounted at 0% will simply be $300 multiplied by the number of periods, which is 5, for a total of $1,500. However, the first cash flow does not occur until six years from today, which means it will not be discounted at all. This gives us a present value of $1,500 for the second annuity. On the other hand, the present value of the first annuity will be calculated at a discount rate of 10%, which will decrease the value of the cash flows. Therefore, the second annuity is greater in value than the first.

Which Is Greater,the Present Value of a Five-Year Ordinary Annuity