Question

Assume that you just received an ordinary annuity with 5 annual payments of $1,000 each. You plan to invest the payments at a 6% annual interest rate. What will the value of the first payment be at the end of the 5th year?

a. $1,187.87
b. $1,224.61
c. $1,300.35
d. $1,262.48
e. $1,152.23

Answer 1

To calculate the value of the first payment at the end of the 5th year, use the formula for the future value of an ordinary annuity. Plugging in the given values, the value of the first payment is $1,338.23.

Step-by-step explanation:

To calculate the value of the first payment at the end of the 5th year, we can use the formula for the future value of an ordinary annuity:

FV = P * ((1 + r)^n - 1) / r

Where:

• FV is the future value of the annuity
• P is the payment amount, in this case $1,000
• r is the annual interest rate, in this case 6% or 0.06
• n is the number of payments, in this case 5

Plugging in the values, we get:

FV = $1,000 * ((1 + 0.06)^5 - 1) / 0.06 = $1,338.23

Therefore, the value of the first payment at the end of the 5th year is $1,338.23.