Question

Part A: You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $5,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

a. $16,614.78

b. $17,943.97

c. $17,445.52

d. $18,442.41

e. $14,953.30

Part B: What is the PV of an annuity due with 5 payments of $7,900 at an interest rate of 5.5%?

a. $41,285.20

b. $40,573.38

c. 35,590.69

d. $43,776.54

e. $41,997.01

Answer 1

Part-A

Information provided:

Annuity= $5,000

Time= 3 years

Interest rate= 5.2%

The question is solved by computing the future value of annuity due.

The future value of the ordinary annuity is computed by entering the below in a financial calculator in the default BGN mode:

PMT= -5,000

N= 3

I/Y= 5.2

Press the CPT key and PV to compute the future value of the annuity due.

The value obtained is 16,614.78.

The future value of the ordinary annuity is $16,614.78.

Hence, the answer is option a.

Part-B

Information provided:

Annuity= $7,900

Time= 5 years

Interest rate= 5.5%

The question is solved by computing the present value of annuity due.

The present value of the ordinary annuity is computed by entering the below in a financial calculator in the default BGN mode:

PMT= -7,900

N= 5

I/Y= 5.5

Press the CPT key and PV to compute the present value of the annuity due.

The value obtained is 35,590.69.

The present value of the ordinary annuity is $35,590.69.

Hence, the answer is option c.