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    Computing the Present VAlue of an Annuity

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    Which of the following 10 year annuities has the greatest present value? Assume all the annuities have the same interest rate.

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

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

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

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

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    Solution Preview

    Please see the attached Excel 97-2003 spreadsheet.

    Which of the following 10 year annuities has the greatest present value? Assume all the annuities have the same interest rate.

    Intuitively, we would say that the annuity that pays $1,000 at the beginning of each year would have the greatest present value. To test this, we will discount all of the annuities at a 5 percent per year interest rate.

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

    PV $7,721.73 This is the present value of the annuity
    FV $- This is the amount remaining after all ...

    Solution Summary

    This solution illustrates how to compute the present values of ordinary annuities and annuities due (in arrears) using the Excel Time Value of Money function.

    $2.19

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