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Consider an annuity with a term of 10 years, and an annual payment of $12,000...

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Accounting

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Consider an annuity with a term of 10 years, and an annual payment of $12,000 in the year 2021. Use an annual effective interest rate of 3%. (This is an effective rate, not a nominal rate.) Calculate the present value of the annuity as of 1/1/2021 in parts (a), (b), and (c). (a) The payments are level. The entire annual amount of $12,000 is paid at the beginning of each year, with the first payment on 1/1/2021. (b) The payments are level. The annual amount of $12,000 is divided into 12 monthly payments, and each monthly payment of $1,000 is paid at the beginning of each month, with the first payment on 1/1/2021. (c) The annuity contract has an annual 2% inflation rider. The annual amount of $12,000 is paid on 1/1/2021, and payments will be made on 1/1 every year thereafter, with each annual amount 2% more than the annual amount of the previous year. Thus, the payment on 1/1/2022 is $12,000 * (1 + 2%), the payment on 1/1/2023 is $12,000 * (1 + 2%)', etc. (Hint: Form a geometric series.)

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