Question

If annuity A has 30 payments of $500 at an interest rate of 10% and annuity B has 30 payments of $500 at an interest rate of 9%, which one has the higher present value?

Answer 1

Solution:

a)Calculation of Present value of annuity

Present Value=(Annuity*Present value annuity factor@given rate for the given period

i)Annuity-$500 @10%

Present value=($500/0.10)*[1-1/(1+0.1)^30]

=$5000*0.94269

=$4713.45

ii)Annuity-$500 @9%

Present value=($500/0.09)*[1-1/(1+0.09)^30]

=$5,555.56*0.924629

=$5,136.83

From the above calculation,you can observe that annuity with lower interest rate have higher present value.Thus annuity B has higher present value.