Question

14. Calculate the present value of an ordinary annuity and an annuity due of a 5 year investment made by contributing $250 on a quarterly basis at an annual rate of 7.75%: Ordinary Annuity Annuity Due A.$4,112.62 $4,192.30 B. $4,368.18 $4,072.89 C. $1,004.79 $1,082.66 D. $8,564.04 $8,264.45

Answer 1

Information provided:

Quarterly payment= $250

Time= 5 years*4= 20 quarters

Interest rate= 7.75%/4= 1.9375% per quarter

1.Ordinary Annuity refers to an annuity that occurs at the end of the period.

The calculator by default is the END mode which is needed to calculate ordinary annuity values.

The present value can be computed by entering the below in a financial calculator:

PMT= 250

N= 20

I/Y= 1.9375

Press the CPT key and PV to compute the present value of ordinary annuity.

The value obtained is 4,112.62.

Therefore, the present value of ordinary annuity is $4,112.62.

2.The question is concerning finding the present value of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This can also be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

The present value of annuity duecan be computed by entering the below in a financial calculator:

PMT= 250

N= 20

I/Y= 1.9375

Press the CPT key and PV to compute the present value of annuity due.

The value obtained is 4,192.30.

Therefore, the present value of ordinary annuity is $4,192.30.

Hence, the answer is option a.

In case of any query, kindly comment on the solution.