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Annuity confusion Help

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  1. Mar 14, 2005 #1
    Annuity confusion Help plz

    $100 is deposited at the beginning of every week for 5 years in an account that pays 14%/a compounded weekly

    this is a simple annuity due

    b)draw a line diagram to represent the annuity
    what is the line diagram going to show present value or future value?
    will it look like this line diagram
    http://ca.pg.photos.yahoo.com/ph/sikandar1984/detail?.dir=9181&.dnm=2f5f.jpg&.src=ph

    c) it says find the present value of the annuity using the formula I think I can do this but WHY are we finding present value instead of future value I dont understand?
     
    Last edited: Mar 15, 2005
  2. jcsd
  3. Mar 15, 2005 #2

    shmoe

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    That line diagram is off as it's representing an ordinary annuity. Yours is an annuity due so there should be a payment at time 0. If they are asking for the present value in the next part, you may as well have your line diagram represent that.

    You are finding the PV instead of the FV because that is what they are asking you for! It depends on your needs as to which is relevent. For example, if you want to set up a trust fund so junior can pull $15,000 out every year for the next 4 years to help with school, you'd need to know the present value so you know how much you have to dump in today. On the other hand if you plan on setting aside $2 of your allowance every week to save up for a new calculator in the fall, you'd like to find the FV so you know how much money you'll have to spend come the new school year and you can start drolling over models in your projected price range now.
     
  4. Mar 15, 2005 #3
    ok I made a line diagram Its a line which says

    PV
    ____________________________________________
    NOW....................1wk.....2wk......1yr......5yrs
    100(1.00269)^-1.....l
    100(1.00269)^-2...............l
    100(1.00269)^-52........................l
    100(1.00269)^-260..................................l

    Now the question says find the present value of the annuity using the formula so i used PV formula = R (1-(1+i)^-n)/(i)

    i=0.00269
    n=260
    R=100
    I subbed in these values and got the present value = $18684.01 IS THIS RIGHT? WHAT DOES THIS VALUE MEAN?
     
    Last edited: Mar 15, 2005
  5. Mar 15, 2005 #4

    shmoe

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    It's an annuity due, so why don't you have a payment under the NOW time?
     
  6. Mar 15, 2005 #5
    1 week is now but NOW is just the heading for all those formulas is the value correct?
     
  7. Mar 15, 2005 #6

    shmoe

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    Ah, I see. Still, you've adjusted your first payment back by a weeks worth of interest. This isn't what happens in an annuity due, since the first payment is made at the time you are calculating the present value.
     
  8. Mar 15, 2005 #7
    OK so what adjustment do I have to make to my line graph to make it true?
     
  9. Mar 15, 2005 #8

    shmoe

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    All the exponents need to be shifted by one. You can think about which direction.
     
  10. Mar 15, 2005 #9
    PV
    ____________________________________________
    NOW....................1wk.....2wk......1yr......5 yrs

    100(1.00269)^-1.....l
    100(1.00269)^-2...............l
    100(1.00269)^-52........................l
    100(1.00269)^-260..................................l

    I DONT UNDERSTAND HOW to do that plz copy and Paste and Edit this one im trying so hard to understand all of ur advice.
     
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