Question

Your grandfather has promised to give you $500 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 7%, which of the folowing is correct for determining the present value of the gift?

a. PV = $500 x 7% x 4
b. PV = $500 x (PV factor, i = 4%, n=7)
c. PV = $500 x (Annuity FV factor, i = 7%, n = 4)
d. PV = $500 x (Annuity PV factor, i = 7%, n = 4)

Answer 1

d. PV = $500 x (Annuity PV factor, i = 7%, n = 4)

Step-by-step explanation:

Your grandfather's offer of %500 a year is a recurring equal payment known as an ordinary annuity. It is different from annuity due because these payments are made at the end of the year unlike the latter that occur at the beginning of the year. Total duration is four years hence N = 4. Additionally, the discount rate is given at 7% hence the i = 7%. Since you are asked to find the present value formula, you will select a choice that has 'annuity present value factor". Therefore, choice D is correct.