Question

Suppose you are going to receive $13,900 per year for five years. The appropriate discount rate is 8.8 percent.

a-1. What is the present value of the payments if they are in the form of an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a-2. What is the present value if the payments are an annuity due? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-1. Suppose you plan to invest the payments for five years. What is the future value if the payments are an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b-2. Suppose you plan to invest the payments for five years. What is the future value if the payments are an annuity due? (Do not round)

Answer 1

a.1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=13900[1-(1.088)^-5]/0.088

=13900*3.9099202

=$54347.89(Approx)

2.Present value of annuity due=Present value of annuity*(1+rate)

=54347.89*1.088

=$59130.51(Approx)

b.1.Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=13900[(1.088)^5-1]/0.088

=13900*5.96090733

=$82856.61(Approx)

2.Future value of annuity due=Future value of annuity*(1+rate)

=82856.61*1.088

=$90147.99(Approx)