Time value of Money Problem example, annuity, regarding, beginning

suyash1989

hi all

i got confused on time value of money regarding annuity and annuity due. I thought the example on page no 287 is an annuity due. If anyone kindly explain why its not an annuity due it would be really great.

Here is my thoughts

1 to 40 years :saving --annuity
41 to next 20 years draw income as retirement--obviously nobody draws the retirement money at the end of the year, it would be the beginning of the 41 year. So it should be an annuity due. Please help me on this.

thanx on advance

hoangvu90

Annuity due means putting in money at the beginning of the month rather than the end. It is usually explicitly stated as well

In this case. she is pulling out money starting at t=41 for 20 years so she needs to have a PV that will allows this to carry on for 20 yrs.

The PV = 981814.74 is obtained from a general annuity, despite the retiree pulling out the money at the beginning of the month, it doesn't affect her method of saving - she saved for this amount using the general annuity formula

Hope that helps

noel

Thanx for the reply.

However, The PV which equals 981814.74 has been calculated as general annuity. If she pulls
out the money(Cash outflow) at the begining of the year, isn't it an annuity due ?. Agreed that
she saves 2000 for 15 years(at the end of the year), it is a general annuity.

to clear my question here is another problem.

XYZ has savings of $75,000 now, will retire 20 years from today and needs 25 payments of $62,000 /year to begin then. What annual deposit the client must make at the end of each year for 20 years? assume account will earn 7%/ year?

my answer PMT = 11,778.68

This is the way i calcuated

First find out how much it worth at t20?
however it is an annuity due so N= 24
then calculate the PV + 62,000(as it would be drawn at the begining of the year, it can't be discounted back)

PV = $773,099

The calcuate the pv of 773,099 including the savings -75,000 and
comute payment.

which equals = -11,778.68

if my answers matches Yours then it is an annuity due. Please if you can explain me whats the difference between the problem i stated above and the example listed on pg 287, it would be great help

Thanx in advance