Question

You are scheduled to receive annual payments of $9,400 for each of the next 27 years. The discount rate is 7.0 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?  

$9,400.00

$7,887.25

$8,288.63

$9,001.91

$10,058.00

Answer 1

Logically the Question is very simple. I will receive 27 installment in either case. So the only difference will be I will receive 1 installment at year 0 only and in that case i will complete the installment in 26 Years only and so the difference will be that payment i received earle - the payment of the 27th year that is forgone.

At T0 we received $9400

At T27 = $9400 * PVif(7%, 27Years)

= $9400 * 0.16093

= $1512.75

So the difference will be = $9,400 - $1512.75 i.e. $7887.25.

Hence the answer will be 2) $7887.25