Suppose you are going to receive $15,500 per year for five years. The appropriat

Question

Suppose you are going to receive $15,500 per year for five years. The appropriate interest rate is 11 percent. a. 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.) Present value $ What is the present value of the payments if the payments are an annuity due? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Present value $ b. 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.) Future value $ What is the future value if the payments are an annuity due

Explanation / Answer

a)Present Value of an ordinary annuity: PV = Pmt x ((1-((1+r)-n )) / r)

Payment per period (PMT) = $15,500
Discount Rate per period= 11%
Number of periods (n) = 5

PV = $15,500 x ((1-(1+0.11)-5))/ 0.11) = $57,286.40

Present Value of an annuity due: PV = Pmt x ((1-(1+r)-n )) / r) x (1+r)

PV = $15,500 x ((1-(1+0.011)-5)) / 0.11) x 1.11 = $63,597.91

B) Future Value of an ordinary annuity: FV = Pmt x ((1+r)n -1)/r

FV = $15,500 x ((1+0.11)5 -1)/0.11) = $96,530.92

Future Value of an annuity due: FV = Pmt x ((1+r)n -1)/r) x (1+r)

FV = $15,500 x ((1+0.11)5 -1)/0.11) x 1.11 = $107,149.32

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