1. Mr. Flint is the president of Martell Company. If he gets a deferred annuity

Question

1. Mr. Flint is the president of Martell Company. If he gets a deferred annuity of $4500 per year for 10 years, with the first payment received at the end of the third year (and the next a year from then and so on until all 10 payments are received), what would be the value of the annuity today, assuming an interest rate of 10%. Please explain how to do this using a BA II Plus calculator. Please say which buttons to press on the calculator to find the answer.

a. $27,650

b. $22,851

c. $33,098

d. $45,000

2. One of the major advantages of a sole proprietorship is

a. That the owner has limited liability

b. That stock in the proprietorship can be easily transferred

c. That it is exempt from many tax rules that would otherwise apply when employees are hired by the firm

d. Low operating costs

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Present Value = 4500/(1+10%)^3 + 4500/(1+10%)^4 + 4500/(1+10%)^5 + 4500/(1+10%)^6 +4500/(1+10%)^7 + 4500/(1+10%)^8 + 4500/(1+10%)^9 + 4500/(1+10%)^10 + 4500/(1+10%)^11 + 4500/(1+10%)^12 = $22851

In case of calculator, you will use N as Period, 4500 will be treated as PMT (Payment) and 10% as I/Y (interest rate)

Option B ($22851) is the correct answer.

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Part B:

Option D (Low operating costs) is the correct answer.

Thanks.

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