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Your friend Anne is planning to invest $700 each year for four years and will earn a rate of 6 percent per year
Your friend Anne is planning to invest $700 each year for four years and will earn a rate of 6 percent per year.
1) Determine the future value of this annuity due if her first $700 is invested now. Show your work.
2) What is the difference between an annuity due and an ordinary annuity?
Expert Solution
1) Computation of the future value of annuity due:-
FV of annuity due = Annuity*(1+rate)*((1+rate)^n-1)/rate
= $700*(1+6%)*((1+6%)^4-1)/6%
= $700*106%*4.3746
= $3,245.97
2) Computation of the future value of ordinary annuity:-
FV of ordinary annuity = Annuity*((1+rate)^n-1)/rate
= $700*((1+6%)^4-1)/6%
= $700*4.3746
= $3,062.23
Difference = FV of annuity due - FV of ordinary annuity
= $3,245.97 - $3,062.23
= $183.73
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