Question

3. Two annuities are available for purchase that your client has identified. The first annuity pays $2,400 each month over a 4 year period at a nominal rate of 11% p.a. The second annuity pays $15,000 each six-month period, again over 4 years, at a nominal rate of 12% p.a., but has an annual fee of $500, paid at the beginning of each year. Identify which of the two annuities would be a better option for your client

Course：Business Finance

Answer 1

Present value of annuity 1	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) r = 11%/12 = .9167% pmt = 12*4 = 48 pmt = 2400 fv = 0 type =0	($92,858.71)
Present value of annuity 2	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) r = 12%/2 = 6% pmt = 2*4 = 8 pmt = 15000 fv = 0 type =0	($93,146.91)
present value of annual fee in case of annuity 2	Using present value function in MS excel	pv(rate,nper,pmt,fv,type) r = 12% pmt = 4 pmt = -500 fv = 0 type =1	$1,700.92
present value of annuity 2	-93146.91+1700.92	91445.99	-91445.99
Annuity 2 is a better option as it results in low payment towards annuity payment