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Sign out xC Chegg Study I Guided Scluti x Click here to access MindTe xMindTap-Cengage Lean iSecure! https //ng.cengage 5516516796343 93939862388 18eisaN+9 Assignment 05-Time Value of Money There are two categories of cash flows: single cash flows, neferred to as "lump sums," and arnuities. Based on your understanding of annuities, answer the folowing questions. Which of the following statements about arnuities are true? Check all that apply. Annuities are structured to provide foxed payments for a fixed period of time. When equal payments are made at the beginning of eadh an annulity due. period for a certain time period, they are treated as D When equal payments are made at the beginning of each period for a certain time period, they are treated as ordinary annuities. D An ordinary annuity of equal time earns less interest than an annuity due. Which of the following is an example of an annuity? O An investment in a certificate of deposit (CD) O A lump-sum payment made to a life insurance company that promises to make a series of equal payments later for some period of time Katie had a high monthly food bill before she decided to cook at home every day in order to reduce her experses. She starts to save $780 every year and plans to renovate her kitchen. She deposits the money ih her savings account at the end of each year and earns 8% annual interest. Katie's savings are an example of an annuity. If Katie decdes to renovate her kitchen, how much would she have in her savings account at the end of six years? $5,722.02 $6,179.79 $3,605.85 $4,863.72 If Katie deposits the money at the beginning of every year and everything else remains the seme, she will save by the end of six years Biue Hegion.png Chapter 14.3 in Cu.. dockExplanation / Answer
a)
Only statement 3 is false.All others are true. statement 3 is false because in ordinary annuity we are making payments at the end of each period. Since annuity due makes payment sooner ,ie; at the begining of each period, it has higher present value than an ordinary annuity,hence higher interest rate than an ordinary annuity. In an ordinary annuity equal payments are made at the end of each period for certain period.
b)
A lumpsum payment made to a LIC that promises to make a series of equal payments later for some period of time is an example for annuity.
An investment in CD is not an annuity, since we are making lumpsum payment while buying the CD and it can be withdrawn on maturity.
c)
Future value of Annuity = A [((1+r)n-1) / r]
Where
A - Annuity payment = 780
r - rate per period = 8%
n - no. of periods = 6
Future value of Annuity =780* [((1.08)6-1) / .08]
= 780*7.3359290368
= 5,722.02 (Option A)
If deposited money at the begining of the period-
Future value of Annuity Due = Future value of Annuity *(1+r)
= 5722.02*1.08
= 6179.79
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