If the future value of an annuity due = $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due,what is the implied discount rate?
A) 1.04%
B) 4.17%
C) 5.00%
D) 8.19%

Question

Quizplus · Accepted Answer

Since the only difference between the two annuities is the timing of the payments (an annuity due has payments at the beginning of each period, while an ordinary annuity has payments at the end of each period), we can use the following formula to calculate the implied discount rate:

Future value of annuity due = Future value of ordinary annuity x (1 + r)

$25,000 = $24,000 x (1 + r) 
1 + r = $25,000 / $24,000 
1 + r = 1.0417 
r = 0.0417 or 4.17%

Therefore, the implied discount rate is 4.17%, which corresponds to option B.

If the Future Value of an Annuity Due = $25,000