Question

An ordinary annuity has a present value of $25,000 when discounted at a rate of 7.2%. What would be the difference in value if this were an annuity due? Answer Format: Enter your answer as a number rounded to 2 decimal places. An answer of 23.456 would be entered as 23.46.

Answer 1

To calculate the difference in value if the ordinary annuity were an annuity due, use the present value formula for annuity due and subtract the original present value.

Step-by-step explanation:

An ordinary annuity is a series of equal cash flows received or paid at equal intervals over a certain period of time. In this case, the present value of the annuity is $25,000 when discounted at a rate of 7.2%. To calculate the difference in value if this were an annuity due, we need to understand that an annuity due is a type of annuity where the payments are made at the beginning of each period instead of at the end.

To calculate the present value of an annuity due, we can use the formula:

Present Value of Annuity Due = Payment [(1 - (1 + r)^(-n)) / r] * (1 + r)

Using this formula, you can calculate the new present value of the annuity if it were an annuity due when discounted at a rate of 7.2%. Subtract the original present value of $25,000 from this new present value to find the difference in value.