Ch $05-$ Blueprint Problems $-$ Time Value of Money

Each payment of an annuity due is compounded for one additional $$ period, so the future value of an annuity due is equal to the future value of an ordinary annuity compound for one period. The equation is:

$FV{A}_{\text{d}\text{u}\text{e}}=FV{A}_{\text{o}\text{r}\text{d}\text{i}\text{n}\text{a}\text{r}\text{y}}(1+I)$

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 annuity period. Th equation is:

Each payment of an annuity due is discounted for one $(1+I).$ The equation is: $|$ period, so the present value of an annuity due is equal to the present value of an ordinary annuity multiplied by

$PV{A}_{\text{d}\text{u}\text{e}}=PV{A}_{\text{o}\text{r}\text{d}\text{i}\text{n}\text{a}\text{r}\text{y}}(1+I)$

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 a spreadsheet.

Quantitative Problem $1$: You plan to deposit $$1,700$ per year for $6$ 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 $6$ 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 $6$ years? Do not round intermediate calculations. Round your answer to the nearest cent. cent.

$

Quantitative Problem $2$: You and your wife are making plans for retirement. You plan on living $25$ years after you retire and would like to have $$85,000$ annually on which 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 day you retire? Do not round intermediate calculations. Round your answer to the nearest cent.

$