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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

Question:Jose Oliva is considering two investment options for a $1,500 gift he received for graduation. Both investments have 8% annual interest rates. One offers quarterly compounding; the other compounds on a semiannual basis. Which investment should he choose? Why?

Killroy Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of \(3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Killroy must estimate the fair value of the trade name. (You will learn more about intangible asset impairments in Chapter 12.) It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Killroy’s estimate of annual cash flows over the next 8 years. The trade name is assumed to have no salvage value after the 8 years. (Assume the cash flows occur at the end of each year.) Probability Cash Flow Estimate Assessment \)380,000 20% 630,000 50% 750,000 30% Instructions (a) What is the estimated fair value of the trade name? Killroy determines that the appropriate discount rate for this estimation is 8%. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.

You have been hired as a benefit consultant by Jean Honore, the owner of Attic Angels. She wants to establish a retirement plan for herself and her three employees. Jean has provided the following information. The retirement plan is to be based upon annual salary for the last year before retirement and is to provide 50% of Jean’s last-year annual salary and 40% of the last-year annual salary for each employee. The plan will make annual payments at the beginning of each year for 20 years from the date of retirement. Jean wishes to fund the plan by making 15 annual deposits beginning January 1, 2017. Invested funds will earn 12% compounded annually. Information about plan participants as of January 1, 2017, is as follows.

Jean Honore, owner: Current annual salary of \(48,000; estimated retirement date January 1, 2042.

Colin Davis, flower arranger: Current annual salary of \)36,000; estimated retirement date January 1, 2047.

Anita Baker, sales clerk: Current annual salary of \(18,000; estimated retirement date January 1, 2037.

Gavin Bryars, part-time bookkeeper: Current annual salary of \)15,000; estimated retirement date January 1, 2032.

In the past, Jean has given herself and each employee a year-end salary increase of 4%. Jean plans to continue this policy in the future.

Instructions

(a) Based upon the above information, what will be the annual retirement benefit for each plan participant? (Round to the nearest dollar.) (Hint: Jean will receive raises for 24 years.)

(b) What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.)

(c) What is the amount of each annual deposit Jean must make to the retirement plan?

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

Question:The Kellys are planning for a retirement home. They estimate they will need $200,000 4 years from now to purchase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.)
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