Question

Present value of an annuity   Consider the following case.  ​(Click on the icon located on the​ top-right corner of the data table below in order to copy its contents into a​ spreadsheet.)

Amount of annuity	Interest rate	Period​ (years)
​$58,000	5​%	6

a.  Calculate the present value of the annuity assuming that it is

​1) An ordinary annuity.

​(2) An annuity due.

b.  Compare your findings in parts a​(1) and a​(2).

All else being​ identical, which type of annuitylong dash—ordinary or annuity duelong dash—is preferable? Explain why.

The present value of the ordinary annuity is $_____

Answer 1

Ordinary annuity:

Ordinary annuity $294,390.14.

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Annuity due:

Annuity due is $309,109.65.

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Annuity due is preferable.

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In case of Annuity due payments begin from the beginning of the period but in case of ordinary annuity payment begins at the end of the year.