You are scheduled to receive annual payments of $3,600 for each of the next 12 years. the discount rate is 8 percent. what is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

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Powell

Business

14 November, 02:29

You are scheduled to receive annual payments of $3,600 for each of the next 12 years. the discount rate is 8 percent. what is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

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Lexi Carney · Answer 1

Yearly payments, P = $3,600

Annual discount rate, i = 8% = 0.08

Number of years, n = 12

Present value (PV) when payments are done at done the beginning of each year:

PV = P+P[1 - (1+i) ^ - (n-1) ]/i = 3,600+3,600[1 - (1+0.08) ^ - (12-1) ]/0.08 = $29,300.27

Present value (PV) when payments are done at the end of each year:

PV = P[1 - (1+i) ^-n]/i = 3,600[1 - (1+0.08) ^-12]/0.08 = $27,129.88

The difference between the two values = $29,300.27 - $27,129.88 = $2,170.39