The present value of an annuity is the sum of the discounted value of all future cash flows.

You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV) ?

a. An annuity that pays $1, 000 at the beginning of each year.

b. An annuity that pays $1, 000 at the end of each year.

c. An annuity that pays $500 at the end of every six months.

d. An annuity that pays $500 at the beginning of every six months.

Question

Elena Sherman

Business

3 March, 19:05

The present value of an annuity is the sum of the discounted value of all future cash flows.

You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV) ?

a. An annuity that pays $1, 000 at the beginning of each year.

b. An annuity that pays $1, 000 at the end of each year.

c. An annuity that pays $500 at the end of every six months.

d. An annuity that pays $500 at the beginning of every six months.

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Answers (1)

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Justin Hood · Answer 1

An annuity that pays $1, 000 at the beginning of each year has the greatest present value (PV).

Explanation:

The present value (PV), provided the defined rate of return, is the current value of the potential amount of cash or source. Future cash reserves are discounted at rate of return, and the lower the real value of potential cash reserves the greater the discount rate.

An annuity that pays $1,000 early in the year has the greatest present interest, since the earliest distribution of positive cash flows is expressed in the payment volume.

It would that the discounts effect on cash flows lower than the other alternatives and maximize the volume of discounted cash flows.

It offers the maximum current value by keeping the other variables stable.