Suppose you are going to receive $13,800 per year for six years. The appropriate
ID: 2772121 • Letter: S
Question
Suppose you are going to receive $13,800 per year for six years. The appropriate interest rate is 8.7 percent.
What is the present value of the payments if they are in the form of an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the present value if the payments are an annuity due? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Suppose you plan to invest the payments for six years. What is the future value if the payments are an ordinary annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Suppose you plan to invest the payments for six years. What is the future value if the payments are an annuity due? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Suppose you are going to receive $13,800 per year for six years. The appropriate interest rate is 8.7 percent.
Explanation / Answer
Annuity (PMT) = $13800
Interest Rate (r) = 8.7 %
Period (I) = 6 Years
Answer to Q. No. 1
Present Value of Ordinary Annuity
P = PMT [(1 - (1 / (1 + r)n)) / r]
= 13800 [(1 - (1/(1.0875)^6)/0.0875]
= 13800 * 0.3938/0.0875
= 13800 * 4.5263 = $62463.32
Present Value : 62463.32
Answer to Q. No. B
Present Value of Annuity Due
P = (PMT [(1 - (1 / (1 + r)n)) / r]) x (1+r)
= 13800 [(1 - (1/(1.087)^6))/0.087]*1.087
= 13800 * 4.5263 * 1.087
= $ 67897.63
Present Value : 67897.63
Answer to Q. No.3
Future Value of Ordinary Annuity
P = PMT [((1 + r)n - 1) / r]
P = 13800 [((1+0.087)^6 - 1)/0.087]
= 13800 *( (1.6496 - 1)/0.087)
= 13800 * 7.4667 = $103039.17
Future Value = $103039.17
Answer to Q. No.4
Future Value of Annuity Due
P = (PMT [((1 + r)n - 1) / r])(1 + r)
= 13800 [((1+0.087)^6-1)/0.087)]*1.087
= 13800 * 7.4667*1.087
= $112003.57
Future Value : $112003.57
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