Question

Yamaha Inc. hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company. The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available. To determine the amount that must be invested each year, a computation must be made using the formula for:

(A) The future value of a deferred annuity.
(B) The future value of an ordinary annuity.
(C) The future value of an annuity due.
(D) None of these answer choices is correct.

Answer 1

A computation must be made using the formula for future value of an annuity due.

Step-by-step explanation:

An annuity due is series of equal payments made at equal intervals at the beginning of each interval. In this case, the CFO insists that the company must invest money at the beginning of each year. When the investment matures at the end of 4 years, the total amount at that point should be equal to the bonus that the CFO was promised. By definition, the future value is the amount to which a current investment will grow over time when placed in an account that pays compound interest, and this value is what should be equal to the bonus that the CFO was promised. Therefore (C) is the correct answer.