The present value of an annuity is the sum of the discounted value of all future

Question

The present value of an annuity is the sum of the discounted value of all future cash flows You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV)? Assume that all annuities earn the same positive interest rate. O An annuity that pays $1,000 at the beginning of each year O An annuity that pays $500 at the beginning of every six months O An annuity that pays $1,000 at the end of each year O An annuity that pays $500 at the end of every six months An ordinary next 12 years (N). If the annuity's appropriate interest rate (I) remains at 9.50% during this time, the annual annuity payment (PMT) will be annuity selling at $14,258.70 today promises to make equal payments at the end of each year for the You Just won the lottery. Congratulationsl The jackpot is $10,000,000, paild in 12 equal annual payments. The first payment on the lottery jackpot will be made today. In present value terms, you really won assuming annual interest rate of 9.50%. Fash Player MAC 31,0,0,10 Q3,34 2004-2016 Api. Ar rights rurved ©2013 ingage Learning teet as Grade t Now Continue without saving MacBook Ai OOD FS esc F2 4

Explanation / Answer

1-

Answer is B

an annuity that pays 500 at the beginning of every six month

2-

Annuity amount

Using PMT function in MS excel

PMT(rate,nper,pv,fv,type) rate = 9.5% nper = 12 pv = 14258.7 fv = o type = 0

PMT(9.5%,12,-14258.7,0,0)

$2,041.67

3-

Annuity amount

Using PMT function in MS excel

PMT(rate,nper,pv,fv,type) rate = 9.5% nper = 12 pv = 0 fv = 10000000 type = 1

PMT(9.5%,12,0,10000000,1)

($440,070.45)

Present value of winning amount

Using PV function in MS excel

pv(rate,nper,pmt,fv,type) rate = 9.5% nper =12 pmt =440070.45 fv = 0 type =1

PV(9.5%,12,-440070.45,0,1)

$3,365,352.57

1-

Answer is B

an annuity that pays 500 at the beginning of every six month

2-

Annuity amount

Using PMT function in MS excel

PMT(rate,nper,pv,fv,type) rate = 9.5% nper = 12 pv = 14258.7 fv = o type = 0

PMT(9.5%,12,-14258.7,0,0)

$2,041.67

3-

Annuity amount

Using PMT function in MS excel

PMT(rate,nper,pv,fv,type) rate = 9.5% nper = 12 pv = 0 fv = 10000000 type = 1

PMT(9.5%,12,0,10000000,1)

($440,070.45)

Present value of winning amount

Using PV function in MS excel

pv(rate,nper,pmt,fv,type) rate = 9.5% nper =12 pmt =440070.45 fv = 0 type =1

PV(9.5%,12,-440070.45,0,1)

$3,365,352.57

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