You own a contract that promises an annuity cash flow of $100 beginning-of-the-year cash flows for each of the next three years (note: the first cash flow is today). At an interest rate of 10%, what is the present value of this contract?
A) $248.69
B) $273.55
C) $331.00
D) $364.10
B
Explanation: B) As an annuity due, solve for the PV of an annuity and then multiply the answer by (1 + r), or via calculator, set the timing of the payment to "begin" instead of "end."
PVA = *(1+r) = $100/.10 * (1-(1/(1.1 )^3 ))*(1+r) = 248.69 * (1.1 ) = $273.55.
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