Using the values below, answer the questions that follow. Calculate the future v
ID: 2721333 • Letter: U
Question
Using the values below, answer the questions that follow. Calculate the future value of the annuity, assuming that it is An ordinary annuity. An annuity due. Compare you findings in parts a(1) and a(2). All else being identical, which type of annuity-ordinary or annuity due-is preferable as an investment? Explain why The future value of the ordinary annuity is. (Round to the nearest cent). The future value of the annuity due is. (Round to the nearest cent.) Compare your findings in (1) and a(2). All else being identical which type of annuity is preferable as an investment? Annuity due, because it yields a greater than future value. Ordinary annuity, because it yields a greater future value.Explanation / Answer
a.(1) The future value of the ordinary annuity = A x (1+r)n- 1/r; where A = periodic payment i.e 3500; r = interest rate i.e 7% or 0.07; n= no of periods i.e 11
Future value of ordinary annuity = 3,500 x (1+0.07)11- 1/0.07
= 3,500 x (2.104851-1)/0.07
= 3,500 (1.104851)/0.07
= 3,866.98/0.07
= 55243 or 55,200 (rounded of to cent)
a.(2) Future value of annuity due = (A x (1+r)n- 1/r) x (1+r) = 55,200 x 1.07 = 59064 or 59100 (rounded of to cent)
b. Annuity Due is preferable because it yields a greater future value
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