There are two categories of cash flows: single cash flows, referred to as \"lump
ID: 2821985 • Letter: T
Question
There are two categories of cash flows: single cash flows, referred to as "lump sums," and annuities. Based on your understanding of annuities, answer the following questions Which of the following statements about annuities are true? Check all that apply An annuity due is an annuity that makes a payment at the end of each period for a certain time period. A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity. An annuity due earns more interest than an ordinary annuity of equal time. Ordinary annuities make fixed payments at the end of each period for a certain time period. Which of the following is an example of an annuity? O A retirement fund set up to pay a series of regular payments O A fund that invests in technology companies and distributes quarterly dividends for two out of four quarters per year but not always the same quarters Luana loves shopping for clothes, but considering the state of the economy, she has decided to start saving. At the erd of each year, she will deposit Si,620 in her local bank, which pays her 12% annual interest. Luana decides that she will continue to do this for the next eight years. Luana's savings are an example of an annuity. How much will she save by the end of eight years? O $19,925.50 o $22,316.56 O $8,047.58 $16,936.68 ir Luana deposts the money at the begining of every year and everythingelse remains the same, she will save by the end of eight years. esc 0 F3 FS 4Explanation / Answer
-An annuity is a stream of equal annual cash flows. Annuities involve calculations based upon the regular periodic contribution or receipt of a fixed sum of money.
Perpetuity is an annuity with an indefinite life, making continuous annual payments.
Answer to part A
(a) False, its ordinary annuity which makes a payment at the end of the year.
(b) True, A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity.
(c) True, An annuity due earns more interest than an ordinary annuity of equal time because annuity due earn one extra interest which is due to the payment at the beginning of the year.
(d) True, ordinary annuities make fixed payments at the end of each period for a certain time period.
Answer to Part (b)
A retirement fund set up to pay a series of regular payment
Answer to part (c)
As Luana has deposit money at the end of the year so
ordinary annuity = P*[(1+i)^n -1]/(i) ---------------------------------equation 1
Where- P - fixed payment each year ($ 1620)
i - earned Interest rate per year (12%)
n - during of annuity in years (8 years)
Put the values in equation (1)
future value of annuity = 1620*[(1+0.12)^8-1]/(0.12)
= 1620*[2.475963 -1]/(0.12)
= 1620*1.475963/(0.12)
= 2391.06/0.12
= $ 19925.5
so option A could be correct.
Answer to part (d)
If Luana deposits the money at the beginning of every year and everything else remains the same, she will save 19925.5*1.12 = $ 22316.56 by the end of 8 years.
as the formulas of annuity due = (1+i)*p*[(1+i)^n -1)/(i)
Please check with your answer and let me know.