# Deferred Annuity problem

• May 2nd 2012, 02:12 AM
suckseed
Deferred Annuity problem
I need help answering this problem:

A sequence of 8 annual payments of $750 each, with the first payment due at the beginning of the 6th year; money is worth 6%. (The beginning of year 6 is the end of year 5.) Find the present value. This is my answer: 750 [ (1-1.06^-13) / .06 ] - 750 [ (1-1.06^-5) / .06 ] =$3,480.24

and this is the book's: $3,689 . The book didn't provide a solution, so I would really appreciate it if someone can help me find where my solution went wrong. Thank you! • May 2nd 2012, 06:07 AM holaboo Re: Deferred Annuity problem I think the book just had an error, your answer is correct by using the Annuity PV formula for years 13 and 5 and taking one away from the other • May 8th 2012, 08:28 AM amul28 Re: Deferred Annuity problem the book has correct answer. Firstly why did u take 750 when the payment is 575.82 ? Secondly if you are taking 13 and 5 it says that your payments are made in advance, but the formula you used is for payments being made at the end. If you wanna use this formula only then you must take 12 and 4. here i attached what i did Attachment 23817 did gave an answer 2,834.31€ • May 8th 2012, 08:25 PM holaboo Re: Deferred Annuity problem Why would you use 575.82? Since its an annuity problem you use the actual value of the payments, not discounted value since the formula discounts the payment for you. The payments are made in years 6 and 14 so we use the end of year 5 and 13. This is also correct. The answer you gave at the end is about 800 too low.... so it is not correct. • May 9th 2012, 12:17 AM amul28 Re: Deferred Annuity problem I'm not getting you, the problem clearly says that the payments are 575.82 so, why would you take 750? And the first payment is at the beginning of 6th year which is end of 5th year. If you are considering 5 and 13 that says you have 5 years which have no payment at the beginning of each year and 8 years with a payment of 575.82 at the beginning of each year. you are using this right $\frac {1-1.06^{-n}}{0.06}$, but this will work when your payments are made at the end of each year (i.e., by taking 4 and 12). Use $\frac {1-1.06^{-n}} {\frac {0.06}{1.06}}$, when payments are made in advance (i.e., by taking 5 and 13). Either of them will give you correct answer with payment 575.82 not 750. check this in wolframalpha: 575.82 [ (1-1.06^(-13)) /( .06/1.06) ] - 575.82 [ (1-1.06^(-5)) / (.06/1.06) ] - Wolfram|Alpha • May 9th 2012, 09:15 AM holaboo Re: Deferred Annuity problem I'm not getting you either, where did you get the 575.82? The OP clearly stated the payments are 750. Also the reason we use years 5 and 13 is because beginning of the 6th year = end of 5th year, why would you have to go back 1 year more? Also since the answer you have given is clearly not the same as that of the text book, your answer is obvious not correct either. Stop trolling • May 9th 2012, 05:28 PM amul28 Re: Deferred Annuity problem Ok my bad. But just change the payment from 575.82 to 750 gives me the answer as 3689 which is the exact. You can check. NB: in my browser it shows me the payments in euros, that's why i have taken 575.82 yesterday. • May 9th 2012, 06:39 PM Wilmer Re: Deferred Annuity problem Why don't you look at it this way: at end of year 4, a loan is set up at 8 payments of$750, rate 6%; 1st payment end of year 5:
that'll give you a present value (loan proceeds) of $4,657. Now just get present value of that today: 4657 / 1.06^4 = 3689 • May 9th 2012, 07:18 PM amul28 Re: Deferred Annuity problem My attachment shows this method, except for the payments. • June 7th 2012, 02:05 AM downthesun01 Re: Deferred Annuity problem It looks like you're using the formula for an annuity immediate (when interest is applied at the end of the year), rather than for an annuity due (when interest is applied at the beginning of the year). The formula should be $\"{a}_{n,i}=\frac{1-\frac{1}{1+i}^{n}}{\frac{i}{1+i}}$ So, what you typed should look like this: 750 [[ (1-1.06^-13) / .06 ]/1.06] - 750 [[ (1-1.06^-5) / .06 ]/1.06]=3,689.0544 I hope that helps. • November 13th 2013, 08:36 AM FinAnalyst Re: Deferred Annuity problem I took a different approach to a solution: I used Excel and created a simple timeline of 12 periods, populating zero into the first four, and 750 in periods five through twelve, thus representing four time-periods with zero payments, followed by eight with$750.

I then used the NPV function with a 6% rate, and the stream of cash flows (Note: with the first 750 entered in period 5, this is assuming payment at the END of the 5th period {or the beginning of #6})

The NPV evaluates to \$3,689.05; the same as the text book.

To Amul28's comment about Euros vs Dollars, it wouldn't matter as long as the same units are used throughout...
• November 13th 2013, 08:39 AM
FinAnalyst
Re: Deferred Annuity problem
FYI, copying and pasting that formula into Wolfram Alpha results in a valuation of 3,283.24

Quote:

Originally Posted by downthesun01
The formula should be

$\"{a}_{n,i}=\frac{1-\frac{1}{1+i}^{n}}{\frac{i}{1+i}}$

So, what you typed should look like this:

750 [[ (1-1.06^-13) / .06 ]/1.06] - 750 [[ (1-1.06^-5) / .06 ]/1.06]=3,689.0544