Time Value of Money: Annuity Cash Flow

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Please follow the instructions in the assessment instructions.

Overview

Respond to four questions and solve three computational problems about time value of money (TMV) as it applies to annuity cash flows.

You know how the TVM concept as applies to single cash flow. However, in real life you will come across financial applications that require multiple or annuity cash flows. That is why it is important to know how to apply the TVM concept to annuity cash flows; for example, how to amortize a mortgage or car loan.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 1: Evaluate the global financial environment.
    • Explain why a saver would prefer more or less frequent interest compounding periods.
    • Explain the purpose of an amortization schedule.
  • Competency 2: Define finance terminology and its application within the business environment.
    • Describe uses of an amortization schedule.
    • Explain why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years.
    • Explain the differences between an ordinary annuity and an annuity due.Assessment Instructions

Respond to the questions and complete the problems.

Questions

In a Word document, respond to the following. Number your responses 1–4.

  1. Explain whether you would you rather have a savings account that paid interest compounded on a monthly basis or compounded on an annual basis? Why?
  2. Describe what an amortization schedule is and its uses. Explain the purpose of an amortization schedule.
  3. Interest on a home mortgage is tax deductible. Explain why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years.
  4. Explain the difference between an ordinary annuity and an annuity due.

Use references to support your responses as needed. Be sure to cite all references using correct APA style. Your responses should be free of grammar and spelling errors, demonstrating strong written communication skills.

Problems

In either a Word document or Excel spreadsheet, complete the following problems.

  • You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet.
  • If you choose to solve the problems algebraically, be sure to show your computations.
  • If you use a financial calculator, show your input values.
  • If you use an Excel spreadsheet, show your input values and formulas.

In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

  1. If interest rates are 8 percent, what is the future value of a $400 annuity payment over six years? Unless otherwise directed, assume annual compounding periods.
    • Recalculate the future value at 6 percent interest and 9 percent interest.
  2. If interest rates are 5 percent, what is the present value of a $900 annuity payment over three years? Unless otherwise directed, assume annual compounding periods.
    • Recalculate the present value at 10 percent interest and 13 percent interest.
  3. What is the present value of a series of $1150 payments made every year for 14 years when the discount rate is 9 percent?
    • Recalculate the present value using discount rate of 11 percent and 12 percent.

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