question archive Question 16 2
Question 16 2
Subject:FinancePrice:2.86 Bought9
Question 16 2.4 points SA Calculate the present 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) 555000 126 15 Ordinary annuity - 374598, annuity due - 419549, annuity due is better because it discounts for one less year. Ordinary annuity - 419549, annuity due 374598, ordinary annuity is better because it compounds for one more year Ordinary annuity = 419549, annuity due - 374590, ordinary annuity is better because it discounts for one less year, Ordinary annuity - 374598. annuity dur419549, annuty do better because it compounds for one more year
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Formula for Present value of ordinary annuity and Present value of annuity due is given below
Present value of ordinary annuity =Annuity payment*((1-(1/(1+i)^m))/i)
Present value of ordinary annuity due =Annuity payment*((1-(1/(1+i)^m))/i)*(1+i)
i-interest rate per period-12%
m-number of periods- 15 (years)
Annuity payment=55000
Thus putting values in formula
Present value of ordinary annuity =55000*((1-(1/(1+12%)^15))/12%)=374598
Present value of ordinary annuity due =55000*((1-(1/(1+12%)^15))/12%)*(1+12%)=419549
Thus the correct answer is
Ordinary annuity=374598,annuity due=419549,annuity due is better because it discounts for one less year (Since in annuity due deposits start 1 year earlier)
