Question

If the future value of an ordinary, 6 year annuity is $7.200 and interest rates are 7.5 percent, what is the future value of the same annulty due? (Round your answer to 2 decimal places.)

Answer 1

The future value of the annuity due is found by multiplying the future value of the ordinary annuity ($7,200) by (1 + the interest rate of 7.5%), which equals $7,740 when rounded to two decimal places.

Step-by-step explanation:

The future value of an annuity due is greater than the future value of an ordinary annuity because each payment in an annuity due is invested for an additional period. To calculate this, we start with the future value of the ordinary annuity, add one period of interest to it. Using the information, if an ordinary annuity has a future value of $7,200 at an interest rate of 7.5%, we can calculate the future value of the annuity due by multiplying the ordinary annuity's future value by (1 + interest rate).

So, the calculation would be: Future Value of Annuity Due = Future Value of Ordinary Annuity × (1 + interest rate)

This would equal: Future Value of Annuity Due = $7,200 × (1 + 0.075)

When calculated, this gives: Future Value of Annuity Due = $7,740 (rounded to two decimal places).