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    BU6009 Assessment 3

    Uploaded by

    Sana Mohd
    This document provides instructions for Assessment 3 in the Introduction to Finance course BU6009. It includes two questions: [1] Calculating the future and present value of two annuities, and [2] Calculating the cash flows and annual deposits needed to fund a retirement annuity for an employee over 12 years of accumulation and 20 years of payout. The assessment must be submitted by the end of the week and late submissions will be reduced by 5%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    BU6009 Assessment 3

    Uploaded by

    Sana Mohd
    45 views4 pages
    This document provides instructions for Assessment 3 in the Introduction to Finance course BU6009. It includes two questions: [1] Calculating the future and present value of two annuities, and [2] Calculating the cash flows and annual deposits needed to fund a retirement annuity for an employee over 12 years of accumulation and 20 years of payout. The assessment must be submitted by the end of the week and late submissions will be reduced by 5%.

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    This document provides instructions for Assessment 3 in the Introduction to Finance course BU6009. It includes two questions: [1] Calculating the future and present value of two annuities, and [2] Calculating the cash flows and annual deposits needed to fund a retirement annuity for an employee over 12 years of accumulation and 20 years of payout. The assessment must be submitted by the end of the week and late submissions will be reduced by 5%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    45 views4 pages

    BU6009 Assessment 3

    Uploaded by

    Sana Mohd
    This document provides instructions for Assessment 3 in the Introduction to Finance course BU6009. It includes two questions: [1] Calculating the future and present value of two annuities, and [2] Calculating the cash flows and annual deposits needed to fund a retirement annuity for an employee over 12 years of accumulation and 20 years of payout. The assessment must be submitted by the end of the week and late submissions will be reduced by 5%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    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

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