Question

How do you know if it is an annuity due or ordinary annuity, if the question does not explicitly say payments start at the beginning or the end of the year ? Also, how do you know which one it is, if the question says "made a payment today, or immediately" means it is an annuity due? (couldn't "today" be the last day of the year)

17. Answer the following questions.

(a) On May 1, 2017, Goldberg Company sold some machinery to Newlin Company on an installment contract basis. The contract required five equal annual payments, with the first payment due on May 1, 2017. What present value concept is appropriate for this situation?

(b) On June 1, 2017, Seymour Inc. purchased a new machine that it does not have to pay for until June 1, 2019. The total payment on June 1, 2019, will include both principal and interest. Assuming interest at a 12% rate, the cost of the machine would be the total payment multiplied by what time value of money concept?

(c) Costner Inc. wishes to know how much money it will have available in 5 years if five equal amounts of $35,000 are invested, with the first amount invested immediately. What interest table is appropriate for this situation?

(d) Megan Hoffman invests in a “jumbo” $200,000, 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accumulated at the end of 3 years?

Answer 1

17. Answer the following questions.

(a) On May 1, 2017, Goldberg Company sold some machinery to Newlin Company on an installment contract basis. The contract required five equal annual payments, with the first payment due on May 1, 2017. What present value concept is appropriate for this situation?	Present Value of an annuity due Explanation; As the first installment of the contract has been paid on the date of the contract signed it is considered as a present value of annuity due. When the payment is paid at the beginning then it is annuity due and if the payment is made at the end of the year then it is known as ordinary annuity
(b) On June 1, 2017, Seymour Inc. purchased a new machine that it does not have to pay for until June 1, 2019. The total payment on June 1, 2019, will include both principal and interest. Assuming interest at a 12% rate, the cost of the machine would be the total payment multiplied by what time value of money concept?	Present Value of ordinary annuity or Present Value of $ 1 Explanation; As the entire payment is made at the end which includes both the principal and interest ,the total payment should be multiplied by Present Value of $1
(c) Costner Inc. wishes to know how much money it will have available in 5 years if five equal amounts of $35,000 are invested, with the first amount invested immediately. What interest table is appropriate for this situation?	Future Value of an annuity due Explanation; As the equal payments are invested and the first amount is invested immediately it is a case of future value of annuity due.
(d) Megan Hoffman invests in a “jumbo” $200,000, 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accumulated at the end of 3 years?	Future Value of $ 1 or Future Value of ordinary annuity Explanation ; As Megan Hoffman want to know how much mount he will get at the end of the 3rd year it is a case of Future Value of $1.