Question

Using the values​ below, answer the questions that follow:

Amount of annuity annually: 2,500 Interest rate: 11% Deposit period​ (years) : 6

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, ordinary or annuity due, is preferable as an​ investment? Explain why.

Answer 1

Information provided:

Annuity= $2,500

Time= 6 years

Interest rate= 11%

a.1.The future value of ordinary annuity is computed by entering the below in a financial calculator in the default END mode:

PMT= 2,500

N= 6

I/Y= 11

Press the CPT key and FV to compute the future value of the ordinary annuity.

The value obtained is 19,782.15.

Therefore, the future value of ordinary annuity is $19,782.15.

a.2 Annuity due refers to annuity that occurs at the beginning of a period.

This can 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.

Enter the below in the financial calculator in BGN mode:

PMT= 2,500

N= 6

I/Y= 11

Press the CPT key and FV to compute the future value of the ordinary annuity.

The value obtained is 21,958.19.

Therefore, the future value of annuity due is $21,958.19.

b. Annuity due is preferable since it has a higher future value. The annuity due is higher since the payment is received at the beginning of the period.

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