For an ordinary annuity annual payments of $100 and a 10% interest rate, how man

Question

For an ordinary annuity annual payments of $100 and a 10% interest rate, how many years will the first payment earn interest? What will this pay-men s value be at the end?? Answer this same question for the fifth payment. (4 years, $146.41; 0 years, $100) Assume that you plan to buy a condo 5 years from now, and you estimate that you can save $2,500 per year. You plan to deposit the money in a bank, that pays 4% interest, and you will make the first deposit at the end of the year. How much will you have after 5 years? How will your? Answer change if the interest rate is increased to 6% or lowered to 3%? ($13,540.81; $14,092.73; $13,272.84)

Explanation / Answer

A) Interest will be received for 4 years i.e year 2, year 3 , year 4 , year 5

Value of annuity = 100* (1+0.10)^4 i.e 146.41

5 th payment will earn no interest

B) After 5 years =2500*PVF(4%,5year) +2500*PVAF( 4% , 4 years ) i.e 13540.81

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