Question

Suppose you are going to receive $14,400 per year for six years. The appropriate interest rate is 9.5 percent.

a. What is the present value of the payments if they are in the form of an ordinary annuity?

b. What is the present value if the payments are an annuity due?

Suppose you plan to invest the payments for six years.

c. What is the future value if the payments are an ordinary annuity?

d. What is the future value if the payments are an annuity due?

Answer 1

Information provided:

Yearly payment= $14,400

Time= 6 years

Interest rate= 9.50%

a.Ordinary annuity is the annuity that occurs at the end of the period. This is calculator with the calculator in the end mode.

The present value of the annuity payments is calculated by entering the below in a financial calculator:

PMT= 14,400

N= 6

I/Y= 9.50

Press the CPT and PV to calculate the present value.

The value obtained is 63,645.49.

Therefore, the present value of ordinary annuity payments is $63,645.49.

b.Annity due refers to the annuity payments made at the beginning of the period.

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 present value of the annuity payments is calculated by entering the below in a financial calculator:

PMT= 14,400

N= 6

I/Y= 9.50

Press the CPT and PV to calculate the present value.

The value obtained is 69,691.81.

Therefore, the present value of annuity due payments is $69,691.81.

c.The future value of ordinary annuity is calculated by entering the below in a financial calculator which is END mode:

PMT= 14,400

N= 6

I/Y= 9.50

Press the CPT and FV to calculate the present value.

The value obtained is 109,711.54.

Therefore, the future value of ordinary annuity payments is $109,711.54.

d.Annity due refers to the annuity payments made at the beginning of the period.

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 future value of the annuity due payments is calculated by entering the below in a financial calculator:

PMT= 14,400

N= 6

I/Y= 9.50

Press the CPT and FV to calculate the present value.

The value obtained is 120,134.14.

Therefore, the future value of ordinary annuity payments is $120,134.14.

In case of any further queries, kindly comment on the solution.