2, What\'s the future value of a 5%, 5-year ordinary annuity that pays $800 each

Question

2, What's the future value of a 5%, 5-year ordinary annuity that pays $800 each year? If this was an annuity due, what would its future value be? Consider the following time line and answer the questions below. 3. 1 2 4 Stream A SO $150 $450 $450 $450 $250 Stream B $450 $450 $150 SO S250 $450 Find the present value of the following cash flow streams at a 5% discount rate. Find the present value of the following cash flow streams at a 0% discount rate. a. b. A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 7 has been offered three possible 4-year contracts. Payments are guaranteed, and they would made at the end of the year. Terms of each contract are as follows (in millions): %. He 4. be 1 2 S3 $5.5 $1 $3 Contract 1 $3 Contract 2 $2 Contract 3 S7 $3 S3 $1 $4.5 As his advisor, which contract would you recommend he accept?

Explanation / Answer

Question 2:

Future value of an annuity (Ordinary annuity): We use excel function =FV(rate,nper,pmt,pv,type) where rate is the interest rate of 5%, the nper is the number of years which is 5 , the pmt is annuity value is 800 and the type =0 meaning ordinary annuity

The future value of this ordinary annuity =FV(5%,5,800,0,0) = $4,420.51

When this becomes an annuity due, we make type =1 in the FV() function of excel

The future value of the annuity due =FV(5%,5,800,0,1) = $4,641.53

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