Using the values below answer the questions that follow Annu

Using the values? below, answer the questions that follow

Annuity : 51,000

Interest : 11 %

Deposit period (years) : 11

a.??Calculate 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?(2).All else being? identical, which type of annuity ordinary or annuitydueispreferable as an? investment? Explain why.

Show with pictures which buttons to select on financial calculator when solving this problem.

Solution

a. For ordinary annuity press the buttons in the sequence

11, N

11, 1/Y

0, FV

51,000, PMT

now press PV

present value of ordinary annuity = 316,532.28

2) PV of annuity due = 316,532.28 * 1.11 = 351,350.83

b. Since in an annuity due the sum is received a period early it holds more value than an ordinary annuity. So each payment needs to be discounted by 1 period less, thereby increasing the value by (1+11%)