Answer: Here's the complete question.
calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? Amount of annuity Interest rate Deposit period (years) $500 12% 6
Ordinary annuity = 4545, annuity due = 4058 , ordinary annuity is better because it discounts for one less year
Ordinary annuity = 4058, annuity due = 4545, annuity due is better because it discounts for one less year.
Ordinary annuity = 4058, annuity due = 4545, annuity due is better because it compounds for one more year.
Ordinary annuity = 4545, annuity due = 4058 , ordinary annuity is better because it compounds for one more year.
Explanation:
Future value of ordinary annuity = Amount*[{(1+r)n – 1}/r]
= 500*[{(1.12)6 – 1}/0.12]
= $4,057.59
i.e. $4,058
Future value of annuity due = (1+r)*Future value of ordinary annuity
= 1.12*4,058
= $4,545
Hence, the answer is
Ordinary annuity = 4058, annuity due = 4545, annuity due is better because it compounds for one more year.
Since payments are made at the beginning of the year