Annuity Due Problem...

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Financemajor

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Hello everyone,
I’m studying for the Dec. Exam and I can’t seem to figure out this problem from Schweser end of chapter problem.
If $1000 is invested today and $1000 is invested at the beginning of each of the next three years at 12% interest (compounded annually), the amount an investor will have at the end of the f
ourth year will be closest to:
A.) $4779
B.) $5353
C.) $6792
Answer: B
Switch to BGN mode: N=4; PMT=-1000; PV=0; I/Y=12; CPT—->FV= 5352.84. Switch back to END mode.
Could this possibly be a mistake? Wouldn’t this be the value at the beginning of the fourth year? I’ve spent way too much time trying to figure this one out and it’s not making sense to me….maybe I need to take a break and come back to it later. Any input would be greatly appreciated. Thanks in advance.
 
Financemajor wrote:Hello everyone,
I’m studying for the Dec. Exam and I can’t seem to figure out this problem from Schweser end of chapter problem.
If $1000 is invested today and $1000 is invested at the beginning of each of the next three years at 12% interest (compounded annually), the amount an investor will have at the end of the fourth year will be closest to:
A.) $4779
B.) $5353
C.) $6792
Answer: B Switch to BGN mode: N=4; PMT=-1000; PV=0; I/Y=12; CPT—->FV= 5352.84. Switch back to END mode.
Could this possibly be a mistake? Wouldn’t this be the value at the beginning of the fourth year? I’ve spent way too much time trying to figure this one out and it’s not making sense to me….maybe I need to take a break and come back to it later. Any input would be greatly appreciated. Thanks in advance.
Click to expand...
No mistake.
Try this: instead of using N = 4, use N = 1. If the answer were the value at the beginning of the first year, it will give you $1,000. If the answer were the value at the end of year 1, it will give you $1,120.
Which answer you get tells you whether it’s beginning or end.
(Hint: it’s end.)
 
Begin mode:-
N=3 will give you the result till beginnning of the fourth year.
Draw the timeline |–|–|–|–. you can calculate till end of third or begin of fourth and calculate the future value at 12% at the the end of fourth, the same result will come.
End mode:-
0–1–2–3–4
N=4. you have to think one yr before for END, so at the end of fourth it’s N=4, then calculate.
1. PV=0, PMT= -1000, N=4, I/y=12, CPT->FV
2.FV=PV, PMT=0, N=1, I/Y=12, CPT->FV
 
Begin mode:-
N=3 will give you the result till beginnning of the fourth year.
Draw the timeline |–|–|–|–. you can calculate till end of third or begin of fourth and calculate the future value at 12% at the the end of fourth, the same result will come.
End mode:-
0–1–2–3–4
N=4. you have to think one yr before for END, so at the end of fourth it’s N=4, then calculate.
1. PV=0, PMT= -1000, N=4, I/y=12, CPT->FV
2.FV=PV, PMT=0, N=1, I/Y=12, CPT->FV
 
Thank you both! This problem along with the other annuity due problems are now making more sense. Thanks again.
 
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