Question 1 – Marian Kirk wishes to select the better of two 6-year annuities. Annuity 1 is an ordinary annuity of $1,970 per year for 6 years. Annuity 2 is an annuity due of $1,820 per year for 6 years.
a. Find the future value of both annuities at the end of year 6, assuming that Marian can earn(1)7% annual interest and (2)14% annual interest.
b. Use your findings in part a to indicate which annuity has the greater future value at the end of year 6 for both the (1) 7% and (2) 14% interest rates..
c. Find the present value of both annuities, assuming that Marian can earn (1) 7%annual interest and (2) 14% annual interest.
d. Use your findings in part c to indicate which annuity has the greater present value for both the (1) 7% and (2) 14% interest rates.
e. Briefly compare, contrast, and explain any differences between your findings using the 7% and 14% interest rates in parts b and d.
Question 2 – Answer each of the following questions.
a. How much money would you have to invest today to accumulate $4,400 after 7 years if the rate of return on your investment is 6%?
b. What is the present value of $4,400 that you will receive after 7 years if the discount rate is 6%?
c. What is the most you would spend today for an investment that will pay $4,400 in 7 years if your opportunity cost is 6%?
d. Compare, contrast, and discuss your findings in part a through c.
Question 3 – Consider the following case.
Amount of Annuity – $37,000
Interest Rate – 11%
Period (Years) – 10
a. Calculate the present value of the annuity assuming that it is
(1) An ordinary annuity.
(2) An annuity due.
b. Compare your findings in parts a(1)and a (2).All else being identical, which type of annuity—ordinary or annuity due—is preferable? Explain why.
