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Present and Future Values of Annuities

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Answer each of the following independent questions

1. Alex Meir recently won a lottery and has the option of receiving one of the following three prizes.

(1) 64,000 cash immediately,
(2) $20,000 cash immediately and six-period annuity of $8,000 beginning one year from today,
(3) a six period annuity of $8,000 beginning one year from today, or
(4) a six year period annuity of $13,000 beginning one year from today.

Assuming an interest rate of 6%, which option would Alec choose?

2. The Weiner Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2020. Weiner will make annual deposits of $100,000 into a special bank account at the end of each of 10 years beginning December 31, 2011. Assuming that the banks pays 7% interest compounded annually, on December 30, 2014 what will be the fund balance after the last payment?

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Solution Summary

This solution responds to two questions. First, it illustrates how to evaluate alternative payout options by computing the present values of several annuities and comparing those to a lump-sum. It then illustrates how to compute the future value of an annuity.