Question

1. Future value of annuities

There are two categories of cash flows: single cash flows, referred to as “lump sums,” and annuities. Based on your understanding of annuities, answer the following questions.

Which of the following statements about annuities are true? Check all that apply.

A. A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

B. An annuity due is an annuity that makes a payment at the end of each period for a certain time period.

C. An annuity due earns more interest than an ordinary annuity of equal time.

D. Ordinary annuities make fixed payments at the end of each period for a certain time period.

2. Which of the following is an example of an annuity?

A. A job contract that pays a regular monthly salary for three years

B. A job contract that pays an hourly wage based on the work done on a particular day

3. Ashley has a large and growing collection of animated movies. She wants to replace her old television with a new LCD model, so she has started saving for it. At the end of each year, she deposits $710 in her bank account, which pays her 12% interest annually. Ashley wants to keep saving for eight years and then buy the newest LCD model that is available. Ashley’s savings are an example of an annuity. How much money will Ashley have to buy a new LCD TV at the end of eight years?

A. $8,732.78

B. $3,527.02

C. $9,780.72

D. $7,422.86

4. If Ashley deposits the money at the beginning of every year and everything else remains the same, she will save _____ by the end of eight years:

A. $9,780.72

B. $12,225.90

C. $8,732.78

D. $3,950.27

Answer 1

1)

A. A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.

C. An annuity due earns more interest than an ordinary annuity of equal time.

D. Ordinary annuities make fixed payments at the end of each period for a certain time period.

2)

A. A job contract that pays a regular monthly salary for three years

3)

=PV(rate,nper,pmt)

=PV(12%,8,-710)

=3527.02

4)

=PV(12%,8,-710,,1)

=3950.27