Question

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?
a. 1.04%
b. 4.17%
c. 5.00%
d. 8.19%

Answer 1

Future value of annuity due can be calculated using the following rule:
FVAD = FVOA x (1+r)
where:
FVAD is the future value of annuity due = $25,000
FVOA is future value of ordinary annuity = $24,000
r is the discount rate we want to calculate

Substitute with these givens in the above equation and get r as follows:
$25,000 = $24,000 × (1 + r)
r = 0.0417 which is equivalent to 4.17%

Answer: b) 4.17%