Question

C This Question: 1 pt 5 of 5 (0 complete) This Quiz: 5 pts possible Present value of an annuity Consider the following case. (Click on the foon here in order to copy the contents of the data table below into a spreadsheet.) Amount of annuity $53.000 Interest rate 7% Period (years) 15 a. Calculate the present value of the annuity assuming that it is (1) An ordinary annuity (2) An annuity due b. Compare your findings in parts (1) and a(2). All else being identical, which type of annuity ordinary or annuity due is preferable? Explain why The present value of the ordinary annuity is (Round to the nearest cent) The present value of the annuity dues (Round to the nearest cent) b. Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity is preferable? (Select the best answer below.) O O Annuity due, because all else being identical, it will yield a higher present value Ordinary annuity, because all else being identical, it will yield a higher present value

Answer 1

a.

1.

Ordinary annuity formula:

1- (1 + i) - Present value = Annuity amount x
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Present value = 53,000 X 1- (1 +0.07)-15 0.07

Present value = 53,000 X 11-0.362446 0.07

Present value = 53,000 x 9.107914

Present value = 482, 719.44

2.

Annuity due formula:

Present value = Annuity amount x 1- (1 + i) - (1-(1+i)-?)

Present value = 53,000 X (1-(1 +0.07)-15 1- (1 + 0.07)

Present value = 53,000 X 0.63755398 0.06542056

Present value = 53,000 X 9.745467985

Present value = 516,509.80

b.

Annuity due is preferable as it yields higher present value.