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Chapter 6: Q13Q (page 301)

Question: Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.

Short Answer

Expert verified

Answer

The future value of an ordinary annuity is converted to the future value of an annuity due by multiplying with the corresponding value by one plus the interest rate (in decimal figures).

Step by step solution

01

Definition of annuity due

Annuity due refers to an annuity, the payment for which is due just after the starting of each period. Periods can be yearly, half-yearly, and quarterly.

02

Conversion to annuity due

The future value of an annuity due can be converted from the future value of an ordinary annuity. The process of calculating the in future ordinary annuity interest involves multiplying the corresponding future values of the ordinary annuity by one plus the interest rate.

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Most popular questions from this chapter

Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.

(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of \(90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?

(b) Robert Hitchcock is 40 years old today and he wishes to accumulate \)500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthday. What annual deposit must Robert make if the fund will earn 8% interest compounded annually?

(c) Diane Ross has 20,000toinvesttodayat947,347. How many years will it take her to accumulate enough to liquidate the debt?

(d) Cindy Houston has a 27,600debtthatshewishestorepay4yearsfromtoday;shehas19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?

Question:Assume the same situation as in Question 11, except that the four equal amounts are deposited at the beginning of the period rather than at the end. In this case, what amount must be deposited at the beginning of each period? (Round to two decimals.)

Your client, Keith Moreland Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 25 years. Moreland has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years.

Instructions You are requested to provide Moreland with the amount of each of the 25 rental payments that will yield an 11% return on investment.

Chris Spear invested $15,000 today in a fund that earns 8% compounded annually. To what amount will the investment grow in 3 years? To what amount would the investment grow in 3 years if the fund earns 8% annual interest compounded semiannually?

Maria Alvarez is investing $300,000 in a fund that earns 4% interest compounded annually. What equal amounts can Maria withdraw at the end of each of the next 20 years?
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