question archive Question 13 24 points Sve A Calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due Comparing the two types of annuities, all else equal, which type is more preferable? Why? Amount of annuity Interest rate Deposit period (years) BM 10 $2,500 A Ordinary annuity - 36216, annuity due - 39114, annuity due is better because it compounds for one more year, CB
Question 13 24 points Sve A Calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due Comparing the two types of annuities, all else equal, which type is more preferable? Why? Amount of annuity Interest rate Deposit period (years) BM 10 $2,500 A Ordinary annuity - 36216, annuity due - 39114, annuity due is better because it compounds for one more year, CB
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Question 13 24 points Sve A Calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due Comparing the two types of annuities, all else equal, which type is more preferable? Why? Amount of annuity Interest rate Deposit period (years) BM 10 $2,500 A Ordinary annuity - 36216, annuity due - 39114, annuity due is better because it compounds for one more year, CB. Ordinary annuity = 39114 annuity due - 36216, ordinary annuity is better because it discounts for one less year CC.Ordinary annuity - 19114, annuity due - 36216, ordinary annuity is better because it compounds for one more year. OD. Ordinary annuity - 36216, annuity due - 39114, annuity due is better because it discounts for one less year.
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Solution
Formula for future value of ordinary annuity and future value of annuity due is given below
Future value of ordinary annuity=Annuity amount*((((1+r)^n)-1)/r)
Future value of annuity due=Annuity amount*(((1+r)^n)-1)/r)*(1+r)
Where
r-interest rate per period=8%
n-number of compounding periods
Thus putting values in formula
Future value of ordinary annuity=2500*((((1+8%)^10)-1)/8%)=36216
Future value of annuity due=2500*((((1+8%)^10)-1)/8%)*(1+8%)=39114
Thus the correct answer is
Ordinary annuity=36216,annuity due=39114,annuity due is better because it compounds for one more year (Since in annuity due deposits start 1 year earlier)
