Which is greater,the present value of a $1,000 five-year ordinary annuity discounted at 10%,or the present value of a $1,000 five-year annuity due discounted at 10%?
A)The ordinary annuity is worth more with a present value of $3,790.79.
B)The annuity due is worth more with a present value of $4,169.87.
C)The ordinary annuity is worth more with a present value of $4,169.87.
D)The annuity due is worth more with a present value of $4,586.85.

Question

Quizplus · Accepted Answer

An annuity due is worth more than an ordinary annuity when discounted at the same rate because each payment of an annuity due is received one period earlier than the payments of an ordinary annuity. Therefore, the present value of an annuity due is greater than the present value of an ordinary annuity. In this case, the present value of a $1,000 five-year ordinary annuity discounted at 10% is $3,790.79, while the present value of a $1,000 five-year annuity due discounted at 10% is $4,169.87. Therefore, the annuity due is worth more.

Which Is Greater,the Present Value of a $1,000 Five-Year Ordinary