Question

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?

Answer 1

Annuity due

Step-by-step 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