Question

The present value of a 25-year annuity due providing for payments of $195 per 3-month period at an interest rate of 10% per annum would be more than $7 200.

true or false?

Answer 1

Information provided:

Quarterly payment= $195

Time= 25 years*4= 100 quarters

Quarterly interest rate= 10%/12= 2.50%

The question pertains to annuity due since the deposits are made at the beginning of the month.

The value of an ordinary annuity can be computed with the help of a financial calculator.

The calculator by default is the BGN mode which is needed to calculate annuity due values. It is computed by entering the below:

PMT=195

I/Y= 2.50

N= 100

Press CPT and PV to compute the present value.

The value obtained is 7,318.24.

The present value of the annuity due is $7,318.24.

Hence, the statement is false.

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