C. What Effect Would An Increase In The Rate You Can Earn Both During And Prior To

Future value of an annuity For each case in the accompanying table, answer the questions that follow.

i';'^'Ca^!¿v-Mr-iiij!''fvrsité';i''■'(yea« r.y:;■ ■ ; J

B 500 12 6

a. Calculate the future value of the annuity assuming that it is

(1) An ordinary annuity.

b. Compare your findings in parts a(l) and a(2). All else being identical, which type of annuity—ordinary or annuity due—is preferable? Explain why.

P4-19 Present value of an annuity Consider the following cases.

B 55,000 12 15

C 700 20 9

a. Calculate the present value of the annuity assuming that it is

(1) An ordinary annuity.

b. Compare your findings in parts a(l) and a(2). All else being identical, which type of annuity—ordinary or annuity due—is preferable? Explain why.

Personal Finance Problem

• E5HI lime value—Annuities Marian Kirk wishes to select the better of two 10-year annuities, C and D. Annuity C is an ordinary annuity of $2,500 per year for 10 years. Annuity D is an annuity due of $2,200 per year for 10 years.

a. Find the future value of both annuities at the end of year 10, assuming that Marian can earn (1) 10% annual interest and (2) 20% annual interest.

b. Use your findings in pan a to indicate which annuity has the greater future value at the end of year 10 for both the (1) 10% and (2) 20% interest rates.

c. Find the present value of both annuities, assuming that Marian can earn (1) 10% annual interest and (2) 20% annual interest.

d. Use your findings in part c to indicate which annuity has the greater present value for both (1) 10% and (2) 20% interest rates.

e. Briefly compare, contrast, and explain any differences between your findings using the 10% and 20% interest rates in parts b and d.

Personal Finance Problem

|j£J2il Retirement planning Hal Thomas, a 25-year-old college graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will be invested to earn an annual return of 10%, which is assumed to be attainable over the next 40 years.

a. If Hal makes annual end-of-year $2,000 deposits into the IRA, how much will he have accumulated by the end of his sixty-fifth year?

b. If Hal decides to wait until age 35 to begin making annual end-of-year $2,000 deposits into the IRA, how much will he have accumulated by the end of his sixty-fifth year?

c. Using your findings in parts a and b, discuss the impact of delaying making deposits into the IRA for 10 years (age 25 to age 35) on the amount accumulated by the end of Hal's sixty-fifth yean d. Rework parts a, b, and c, assuming that Hal makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning-of-year deposits on the future value accumulated by the end of Hal's sixty-fifth year.

Personal Finance Proslem

Value of a retirement annuity An insurance agent is trying to sell you an immediate-retirement annuity, which for a single amount paid today will provide you with $12,000 at the end of each year for the next 25 years. You currently earn 9% on low-risk investments comparable to the retirement annuity. Ignoring taxes, what is the most you would pay for this annuity?

Personal Finance Problem

125331 Funding your retirement You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period.

a. How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity?

b. How much will you. need today as a single amount to provide the fund calculated in part a if you earn only 9% per year during the 20 years preceding retirement?

c. What effect would an increase in the rate you can earn both during and prior to retirement have on the values found in parts a and b? Explain.

Personal Finance Problem

Value of an annuity versus a single amount Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (i.e., $1,000,000 over 25 years) or as a single amount of $500,000 paid immediately.

a. If you expect to be able to earn 5% annually on your investments over the next 25 years, ignoring taxes and other considerations, which alternative should you take? Why?

b. Would your decision in part a change if you could earn 7% rather than 5% on your investments over the next 25 years? Why?

c. On a strictly economic basis, at approximately what earnings rate would you be indifferent between the two plans?

Perpetuities Consider the data in the following table.

Pei^ccuity • Annual amount ":: ! Discount rate '

D 60,000 5

Determine, for each of the perpetuities:

a. The appropriate present value interest factor.

b. The present value.

Personal Finance Problem

Creating an endowment Upon completion of her introductory finance course, Maria Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were wealthy alumni of the university she was attending, to create an endowment. The endowment is to allow three needy students to take the introductory finance course each year in perpetuity. The guaranteed annual cost of tuition and books for the course is $600 per student. The endowment will be created by making a single payment to the university. The university expects to earn exactly 6% per year on these hinds.

a. How large an initial single payment must Maria's parents make to the university to fund the endowment?

b. What amount would be needed to fund the endowment if the university could earn 9% rather than 6% per year on the funds?

Value of a mbced stream For each of the mixed streams of cash flows shown in the following table, determine the future value at the end of the final year if deposits Ire made into an account paying annual interest of 12%, assuming that no withdrawals are made during the period and that the deposits are made:

a. At the end of each year.

b. At the beginning of each year.

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