Question

(Round to the nearest cent)

in order Future value of an annuity Using the values below, answer the questions that follow. (Click on the icon here to copy the contents of the data table below into a spreadsheet.) Amount of annuity $6,500 Interest rate 5% Deposit period (years) 7 a. Calculate the future value of the annuity, assuming that it is (1) An ordinary annuity. (2) An annuity due. b. Compare your 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.

Answer 1

a)

1)

Future value Px[(1+r)^n-1]=r Here, 5% A Interest rate per annum B Number of years C Number of payments per per annum A: Interest rate per period (r) BxC Number of periods (n) Payment per period (P) 1 5%) 6,500 Future value $ 52,923.05 6500x((1+5%)^7-1):5%

2)

Future value (1+r)xPx[(1+r)^n-1)=r|| Here, 5% 1 A Interest rate per annum B Number of years C Number of compoundings per per annum A:C Interest rate per period (r) BxC Number of periods (n) Payment per period (P) 5% 6,500 Future value $ 55,569.21 (1+5%)x6500x((1+5%)^7-1):5%

b)

Annuity due is preferable as it has more future value

*Please rate thumbs up