Question

Matt is considering purchasing one of two annuities. The first annuity, an ordinary annuity, will pay $1,000 at the end of each quarter for 20 years. The second annuity, an annuity due, will pay $1,000 at the beginning of each quarter for 20 years. Which of the following statements is correct regarding these annuities?

A. The present value of an ordinary annuity is equal to the present value of an annuity due.

B. An ordinary annuity has a higher future value but a lower present value than an annuity due.

C. The future value of an ordinary annuity is greater than the future value of an annuity due.

D. An annuity due has both a higher present value and a higher future value than an ordinary annuity.

E. An annuity due will pay one more payment than an ordinary annuity will.

Last year, Chris’ Groundhog Farm added $10,300 to retained earnings from sales of $124,600. The company had cost of sales of $64,580, other expenses of $2,300, dividends of $2,500, and interest paid of $2,750. The tax rate was 34 percent. What was the amount of the depreciation & amortization expense?    A. $13,512 B. $17,651 C. $21,187 D. $27,346 E. $35,576

Scott likes to use his Chase Manhattan bank Visa card when he goes shopping for exotic foods. His bank charges 15% annual interest. Which of the following is true?   

A. If Chase Manhattan charges interest annually, the effective annual rate would be equal to 15%.

B. If Chase Manhattan charges interest daily, the effective annual rate would be less than 15%.

C. If Chase Manhattan charges interest monthly, the effective annual rate would be less than 15%.

D. If Chase Manhattan charges interest monthly, the effective annual rate can either be greater than or equal to 15% given the degree that the purchases are exotic.

E. none of the above.

Answer 1

1)

The correct option is D. An annuity due has both a higher present value and a higher future value than an ordinary annuity.

This is because the present value interest rate factor (PVIFA ) used to calculate the present value of annuity will be higher for an annuity due since the cash flows for an annuity due are discounted less than cash flows for an ordinary annuity.

Also the future value interest rate factor of annuity (FVIFA) used to calculate future value of an annuity is > FVIFA for an ordinary annuity.

2)

Net income = dividend + retained earnings = 2500 + 10,300 = 12,800

depreciation & amortization expense = Sales - Cost of sales-other expenses - interest expense - (Net income/(1-tax rate))

= 124,600 - 64,580 - 2300 - 2750 - (12,800/(1-0.34)) = 35,576 (after rounding off)

hence the correct option Is E. $35,576