Question

Future value of an annuity 

Amount of annuity	Interest rate	Deposit period​ (years)
​$1,000	8​%	10

a.  Calculate the future value of the​ annuity, assuming that it is

​(1) An ordinary annuity.

​(2) An annuity due.

b.  Compare your findings in parts a​(1) and a​(2).

All else being​ identical, which type of annuity long dash—ordinary or annuity due long dash—is preferable as an​ investment? Explain why.

a.​ (1) The future value of the ordinary annuity is ​$____.

  ​(Round to the nearest​ cent.)

Answer 1

Information provided:

Annuity= $1,000

Interest rate= 8%

Time= 10 years

a.Ordinary annuity refers to the annuity at the end of the period.

The future value of an ordinary annuity can be computed with the help of a financial calculator. The calculator by default is the END mode which is needed to calculate ordinary annuity values. The future value can be computed by entering the below:

PMT= 1,000

N= 10

I/Y= 8

Press CPT and FV to compute the future value.

The value obtained is 14,486.56.

The future value of the ordinary annuity is $14,486.56.

2.Annuity Due

Annuity due refers to annuity that occurs at the beginning of a period.

This can also be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^nd BGN 2^nd SET on the Texas BA II Plus calculator.

The question can also be solved using a financial calculator by inputting the below into the calculator in BGN mode

PMT= 1,000

N= 10

I/Y= 8

Press CPT and FV to compute the future value.

The value obtained is 15,645.49.

The future value of an annuity due is $15,645.49.

b.Annuity Due is the preferable investment since its future value is higher.

In case of any query, kindly comment on the solution.