# Time Value of Money: Annuity Cash Flow

Respond to the questions and complete the problems.

#### Questions

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

- 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?
- Describe what an amortization schedule is and its uses. Explain the purpose of an amortization schedule.
- 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.
- 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.

- 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.

- 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.

- 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.

# Time Value of Money: Annuity Cash Flow Scoring Guide

CRITERIA NON-PERFORMANCE BASIC PROFICIENT DISTINGUISHED Explain why a saver would prefer more or less frequent interest compounding periods. Does not identify why a saver would prefer more or less frequent interest compounding periods. Explains why a saver would prefer more or less frequent interest compounding periods but omits key elements in the explanation. Explains why a saver would prefer more or less frequent interest compounding periods. Analyzes why a saver would prefer more or less frequent interest compounding periods and connects the analysis to relevant real-world examples. Describe the uses of an amortization schedule. Does not describe the uses of an amortization schedule. Describes the uses of an amortization schedule but omits key elements. Describes the uses of an amortization schedule. Analyzes the uses of an amortization schedule and connects the analysis to relevant real-world examples. Explain the purpose of an amortization schedule. Does not explain the purpose of an amortization schedule. Explains of the purpose of an amortization schedule but omits key elements. Explains the purpose of an amortization schedule. Analyzes the purpose of an amortization schedule and connects the analysis to relevant real-world situations. Explain why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years. Does not explain why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years. Explains why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years but omits key elements. Explains why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years. Analyzes why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years and connects the analysis to relevant real-world situations. Explain the differences between an ordinary annuity and an annuity due. Does not explain the differences between an ordinary annuity and an annuity due. Explains an annuity but does not explain the key differences between an ordinary annuity and an annuity due. Explains the differences between an ordinary annuity and an annuity due. Analyzes the differences between an ordinary annuity and an annuity due and connects the analysis to relevant real-world situations. Compute the future value of an interest rate. Does not compute the future value of an interest rate. Computes the future value of an interest rate using inaccurate or incomplete data. Computes the future value of an interest rate. Computes the future value of an interest rate and explains the computation. Compute the present value of an interest rate. Does not compute the present value of an interest rate. Computes the present value of an interest rate using inaccurate or incomplete data. Computes the present value of an interest rate. Computes the present value of an interest rate and explains the computation.

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