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19 May, 09:27

Augustine is interested in whether he should purchase an annuity or an annuity due today. The annuity that he is considering will pay $100 per year starting in 2 years and ending in 5 years. The annuity due will begin payments of $100 per year for 4 years starting in 1 years. With a discount rate of 11%, which investment should he purchase today and why?

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  1. 19 May, 09:50
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    Annuity due

    Explanation:

    In this question we have to compare the present value based on annuity or annuity due.

    On annuity:

    Years Cash flows Discount factor Present value

    2 $100.00 0.8116224332 $81.16

    3 $100.00 0.7311913813 $73.12

    4 $100.00 0.6587309741 $65.87

    5 $100.00 0.5934513281 $59.35

    Present value $279.50

    On annuity due

    Years Cash flows Discount factor Present value

    2 $100.00 0.9009009009 $90.09

    3 $100.00 0.8116224332 $81.16

    4 $100.00 0.7311913813 $73.12

    5 $100.00 0.6587309741 $65.87

    Present value $310.24

    Therefore, he should purchase annuity due as it has the high present value
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