Question

In: Finance

What is the future value of a five-year ordinary annuity of $1,000 per year if the interest rate is 4.30%? Hint: solve for year 5.


Question 10 

What is the future value of a five-year ordinary annuity of $1,000 per year if the interest rate is 4.30%? Hint: solve for year 5. 


Question 11 

What is the present value of a perpetuity that offers to pay $100 next year and every year after the payment grows at 4.9%. Investments with similar risk are offering an 8% annual return.

Solutions

Expert Solution

Question 10:

P = Annual payment = $1,000

n = 5 years

r = interest rate = 4.30%

Future Value = P * [(1+r)^n - 1] / r

= $1,000 *[(1+4.30%)^5 - 1] / 4.30%

= $1,000 * 0.23430231101 / 0.043

= $5,448.89095380099

= $5,448.89

Therefore, Future value of annuity is $5,448.89

Question 11:

P = First payment = $100

r = annual return = 8%

g = growth rate = 4.9%

Present Value of perpetuity = P / (r-g)

= $100 / (8% - 4.9%)

= $100 / 0.031

= $3,225.80645

Therefore, present value of perpetuity is $3,225.81


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