Question

In: Finance

4. Using the values below, answer the questions that follow: Amount of annuity Interest rate Deposit...

4. Using the values below, answer the questions that follow:

Amount of annuity Interest rate Deposit period (years)

$500

9%

10

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

(1) An ordinary annuity. (0.5 marks)

(2) An annuity due. (0.5 marks)

b) Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or annuity due—is preferable as an investment? Explain why. (0.5 Marks)

Expert Solution

1) Ordinary Annuity

Future Value of annuity = 500 [ { ( 1 + 0.09 )¹⁰ - 1 } / 0.09 ]

= 500 * [ 1.3674 / 0.09 ]

= 500 * 15.19293

= $ 7,596.47 Answer

2) Future value of annuity due =

2) Future value of annuity due = ( 1 + 0.09 ) * 500 [ { ( 1 + 0.09 )¹⁰ - 1 } / 0.09 ]

= 1.09 * 500 * [ 1.3674 / 0.09 ]

= 1.09 * 500 * 15.19293

= $ 8,280.15 Answer

jeff jeffy answered 1 year ago

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