Introduction to Finance BU6009

Assessment three – week 3

Instructions:

1. The assessment must be submitted before the end of the week.

2. Late submission will result in a reduction of 5% as per institutional policy. 

Question 1:

Mariam wishes to select the better of two 10-year annuities, C and D. Annuity C is an ordinary annuity of
$2,500 per year for 10 years. Annuity D is an annuity due of $2,200 per year for 10 years.

a. Find the future value of both annuities at the end of year 10 if Mariam can earn 10% annual
interest.
b. Use your findings in part a to indicate which annuity has the greater future value at the end
of year 10 for the 10% interest rate.
Introduction to Finance BU6009
Assessment three – week 3

c. Find the present value of both annuities if Mariam can earn 10% annual interest.

d. Use your findings in part c to indicate which annuity has the greater present value.
when interest rate is 10%, the present value of the ordinary annuity is greater than that of the annuity
due.
e. Briefly compare, contrast, and explain any differences between your findings using in parts b and d.
at 10%, annuity C has a greater present value than annuity D
Introduction to Finance BU6009
Assessment three – week 3

Use the Financial Tables to find the answer for (a) and use the formula to find the answer for (c).

Question 2: Case Study

Finding Mr. Yousif Retirement Annuity

Sunrise Industries aims to collect funds to provide its research vice-president, Mr. Yousif, with a
retirement annuity. Mr. Yousif will retire after precisely twelve years. Upon retirement, he will receive
an annual end-of-year payment of $42,000 for exactly 20 years. If he dies before the 20-year period
expires, annual payments will pass to his heirs. During the 12-year "accumulation period," Sunrise needs
to fund the annuity by making equivalent annual end-of-year deposits into a 9-per-cent interest account.
When the 20-year "distribution era" begins, Sunrise aims to transfer the accrued money into an account
receiving a guaranteed 12% per annum. The account balance would equal zero at the end of the delivery
cycle. Notice that the first Case Initial sum Annual cash flow rate deposit will be made at year 1 end and
the first delivery payment will be issued at year 13 end.

Required

a. Draw a time line depicting all the cash flows associated with Sunrise’s view of the retirement
annuity.

b. How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000
annuity?

PV = PMT x (PVIFAi%,n)

PV = $42,000 x (PVIFA12%,20)
Introduction to Finance BU6009
Assessment three – week 3

PV = $42,000 x 7.469

PV= $313,698

c. How large must Sunrise’s equal annual end-of-year deposits into the account be over the 12-year
accumulation period to fund fully Mr. Yousif’s retirement annuity?

PMT = $313,698  (FVIFA9%, 12 yrs.)

PMT = $313,698  20.141

PMT = $15,575.10

d. How much would Sunrise have to deposit annually during the accumulation period if it could earn
10% rather than 9% during the accumulation period?

PMT = $313,698  (FVIFA10%,12 yrs.)

PMT = $313,698  21.384

PMT = $14,669.7

e. How much would Sunrise have to deposit annually during the accumulation period if Mr. Yousif’s
retirement annuity were a perpetuity and all other terms were the same as initially described?

PV = PMT x (1  i)

PV = $42,000 x (1  .12)

PV = $42,000 x 8.333

PV = $349,986

End-of-year deposit:

PMT = FVAn  (FVIFAi%,n)

PMT = $349,986  (FVIFA9%,12 yrs.)

PMT = $349,986  20.141

PMT = $17,376.7