Ask Question
BusinessBusiness
5 September, 06:30

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information

+2
Answers (1)
  1. 5 September, 06:52
    0
    The list of statements to answer this question is:

    A) The future value of Annuity A is greater than the future value of Annuity B. B) Annuity B will pay one more payment than Annuity A will. C) Annuity A has a higher future value but a lower present value than Annuity B. D) Annuity B has both a higher present value and a higher future value than Annuity A. E) The present value of Annuity A is equal to the present value of Annuity B.

    Answer:

    D) Annuity B has both a higher present value and a higher future value than Annuity A.

    Explanation:

    To calculate the present value of an annuity, you must discount each future cash flow, each according to the number of periods that correspond to it, counting from the current date.

    The present value of an annuity depends on: the amount of the cash flow (montly payment), the moment when each cash flow is paid, the number of periods, and the rate of return.

    For this question, the two annuities pay the same amount ($100), the number of payments is the same (the product of ten years by the number of payments every year: 10 * 12 = 120), and the rate of return is the same (8%).

    What is different is that annuity B starts paying one month earlier then annuity A.

    Since, the stream of cash flows of annuity A is one month further in time than that of annuity B, the present value of each cash flow from B is less than the present value of the corresponent cash flow from B.

    Hence, the present value of annuity B is higher thant the present value of annuity A.

    The future value can be calculated using the present value and the formula Future value = Present value * (1 + r) ⁿ. Since, the present value of annuity B is higher, its future value will be higher too.

    Therefore, you conclude that annuity B has both a higher present value and a higher future value than annuity A.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers
You Might be Interested in
Wal-Mart is famous for requesting ever lower prices from its suppliers: if a supplier offers a product for $45, Wal-Mart will ask the supplier to consider introducing a similar product for $39.
Answers (1)
Which of the following is NOT a characteristic of long-run equilibrium for a perfectly competitive firm? Select one: a. The firm produces the output level at which long-run average cost is at its minimum. b.
Answers (1)
Carlos purchased an apartment building on November 16, 2017, for $3,000,000. Determine the cost recovery for 2017. a. $9,630b. $11,910c. $13,950d. $22,740e. None of the above
Answers (1)
A high school basketball team won 40% of its first 15 games. beginning with the 16th game, how many games in a row does the team now have to win in order to have a 55% winning record?
Answers (1)
At the age of 16 Marty contracted with Cream-of-the-Crop Cycles to purchase a motorcycle. Marty agreed to make monthly payments until the purchase price and interest are paid in full. If Marty disaffirms the contract:
Answers (1)
New Questions in Business
Jones Company uses the weighted-average method in its process costing system. The Packaging Department started the month with 400 units in process that were 70% complete, receiving 2,500 units from the Cutting Department.
Answers (1)
Newspaper 14 think and review
Answers (1)
Higher inflation a. causes firms to change prices more frequently and makes relative prices less variable. b. causes firms to change prices more frequently and makes relative prices more variable. c.
Answers (1)
Juanita, the stadium manager, spends $10,000 on a broadcast tv ad, $15,000 on a cable tv ad, and $4,000 on a radio ad. what percentage of radio advertising did she do? (round to the nearest percent.)
Answers (1)
Toussaint Company issued 10,000 shares of its common stock in exchange for merchandise that it will resell. The merchandise had originally cost the other party $250,000 and had a fair value of $300,000 on the date of the exchange.
Answers (1)
Home » Business » You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent.
Sign Up Forgot Password?