Maximizing Savings: Understanding Annuities for Long-Term Financial Planning

[aisha]

Annuity confusion Help please

$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 don't understand?

 

[shmoe]

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.

 

[aisha]

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?

 

[shmoe]

It's an annuity due, so why don't you have a payment under the NOW time?

 

[aisha]

1 week is now but NOW is just the heading for all those formulas is the value correct?

 

[shmoe]

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.

 

[aisha]

OK so what adjustment do I have to make to my line graph to make it true?

 

[shmoe]

All the exponents need to be shifted by one. You can think about which direction.

 

[aisha]

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 please copy and Paste and Edit this one I am trying so hard to understand all of ur advice.