Many assets provide a series of cash inflows over time; and many obligations require a series of payments. When the payments are equal and are made at fixedintervals, the series is an annuity. There are three types of annuities: (1) Ordinary (deferred) annuity, (2) Annuity due, and (3) Growing annuity. One can find aannuity's future and present values, the interest rate built into annuity contracts, and the length of time it takes to reach a financial goal using an annuity. Growingannuities are often used in the area of financial planning. Their analysis is more complex and often easier solved using a financial spreadsheet, so we will limit ourdiscussion here to the first two types of annuities.The future value of an ordinary annuity, FVAN, is the total amount one would have at the end of the annuity period if each payment (PMT) were invested at a giveninterest rate and held to the end of the annuity period. The equation is:Each payment of an annuity due is compounded for one -Select-compounded for one -Select- period. The equation is:FVAN= PMTEach payment of an annuity due is discounted for one -Select-multiplied by (1 + I). The equation is:(1+period, so the future value of an annuity due is equal to the future value of an ordinary annuityFVAdue=FVAordinary (1+1)The present value of an ordinary annuity, PVAN, is the value today that would be equivalent to the annuity payments (PMT) received at fixed intervals over the annuityperiod. The equation is:IPVAN= PMT[1(1+1) NIperiod, so the present value of an annuity due is equal to the present value of an ordinary annuityPVA due = PVA ordinary (1+1)One can solve for payments (PMT), periods (N), and interest rates (I) for annuities. The easiest way to solve for these variables is with a financial calculator or aspreadsheet.Quantitative Problem 1: You plan to deposit $2,100 per year for 5 years into a money market account with an annual return of 2%. You plan to make your firstdeposit one year from today.a. What amount will be in your account at the end of 5 years? Do not round intermediate calculations. Round your answer to the nearest cent.$b. Assume that your deposits will begin today. What amount will be in your account after 5 years? Do not round intermediate calculations. Round your answer tothe nearest cent.$ Quantitative Problem 2: You and your wife are making plans for retirement. You plan on living 30 years after you retire and would like to have $95,000 annually onwhich to live. Your first withdrawal will be made one year after you retire and you anticipate that your retirement account will earn 10% annually.a. What amount do you need in your retirement account the day you retire? Do not round intermediate calculations. Round your answer to the nearest cent.$b. Assume that your first withdrawal will be made the day you retire. Under this assumption, what amount do you now need in your retirement account the dayyou retire? Do not round intermediate calculations. Round your answer to the nearest cent.$

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Quantitative Problem 1: You plan to deposit $2,100 per year for 5 years into a money market account with an annual return of 2%. You plan to make your first deposit one year from today. a. What amount will be in your account at the end of 5 years? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assume that your deposits will begin today. What amount will be in your account after 5 years? Do not round intermediate calculations. Round your answer to the nearest cent. $

Quantitative Problem 1: You plan to deposit $2,100 per year for 5 years into a money market account with an annual return of 2%. You plan to make your first deposit one year from today. a. What amount will be in your account at the end of 5 years? Do not round intermediate calculations. Round your answer to the nearest cent. $ b. Assume that your deposits will begin today. What amount will be in your account after 5 years? Do not round intermediate calculations. Round your answer to the nearest cent. $

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 9MC: The process that determines the present value of a single payment or stream of payments to be...

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A growing annuity is a cash flow stream with ________ (an infinite, a finite) life, while a growing perpetuity is a cash flow stream with a _______ (infinite or finite) . Therefore, given same initial cash flow, growth rate, and interest rate, the present value of the perpetuity will always be ___________ (greatwe rhan, less than, or equal to) the present value of the annuity.
Which of the following statements is CORRECT? The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year. The cash flows for an annuity due must all occur at the beginning of the periods. The cash flows for an ordinary annuity occur at the beginning of the periods. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as an ordinary annuity. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
Perpetuities are also called annuities with an extended or unlimited life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply. In a perpetuity, returns—in the form of a series of identical cash flows—are earned. A perpetuity continues for a fixed time period. A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. The principal amount of a perpetuity is repaid as a lump-sum amount. Your grandfather wants to establish a scholarship in his father’s name at a local university and has stipulated that you will administer it. As you’ve committed to fund a $15,000 scholarship every year beginning one year from tomorrow, you’ll want to set aside the money for the scholarship immediately. At tomorrow’s meeting with your grandfather and the bank’s representative, you will need to deposit…
Perpetuities are also called annuities with an extended or unlimited life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply. In a perpetuity, returns—in the form of a series of identical cash flows—are earned. A perpetuity continues for a fixed time period. A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. The principal amount of a perpetuity is repaid as a lump-sum amount.
Perpetuities are also called annuities with an extended or unlimited life. Based on your understanding of perpetuities, answer the following questions. Which of the following are characteristics of a perpetuity? Check all that apply. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor’s opportunity interest rate. In a perpetuity, returns—in the form of a series of identical cash flows—are earned. A perpetuity continues for a fixed time period. The principal amount of a perpetuity is repaid as a lump-sum amount. Your grandfather wants to establish a scholarship in his father’s name at a local university and has stipulated that you will administer it. As you’ve committed to fund a $5,000 scholarship every year beginning one year from tomorrow, you’ll want to set aside the money for the scholarship immediately. At tomorrow’s meeting with your grandfather and the bank’s representative, you will need to…
Which of the following statement is true? a) An ordinary annuity is an annuity in which the cash flow occurs at the start of each period b) None of the above c) A deferred annuity is an annuity in which the first cash flow occurs at the end of the time period between each subsequent cash flow d) with a credit foncier loan ( a loan for a fixed period with regular repayments) as time passes a smaller proportion of each repayment goes to paying off the interest on the loan
The future value of an annuity due is determined one period after the first cash flow in the series. a.True b.False
The ____ of an annuity is the sum of all payments plus all interest earned. The frequency that interest is computed and added to the balance is called the _____. The rate per compounding period is found by _____.? When money is borrowed, a fee is charged for the money borrowed. This fee is rent paid for the use of another's money, just as rent is paid for the use of another's house. The fee is called ____. It is usually computed as a percentage called the _______. of the principal over a given period of time. The interest rate, unless otherwise stated, is an ____rate.? Fill in the blanks to the questions thanks!
Using an annuity, you may calculate the present value of a single payment or a series of payments you will receive. Is this statement correct or incorrect?
An annuity in which the first cash flow occurs at the beginning of the period is called a/an: Oordinary perpetuity. growth annuity. Oordinary annuity. annuity due.
Select all the statements on perpetuities that are correct. a. The present value of a perpetuity increases if the interest rate increases. b. If I multiply the present value of a perpetuity with the interest rate then I get the value of a single payment of the cashflow stream. c. The present value value of a perpetuity is independent of the interest rate. d. The present value of a perpetuity is infinite as all the payments add up to infinity. e. A perpetuity describes a constant cashflow at the end of each year that continues infinitely long.
Perpetuity is a type of annuity which has infinite period of payments. The present value of a perpetuity equals to the annual payment divided by the required rate of return. True or False