You Are Considering Two Equally Risky Annuities, Each of Which

question 58

Multiple Choice

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

• A) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
• B) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
• C) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
• D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
• E) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

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Definitions:

Manufacturing Overhead

Indirect factory-related costs that are incurred when a product is manufactured, including costs like rent, utilities, and maintenance of equipment.

Selling and Administrative Expenses

These are indirect costs that are not directly tied to the production of goods or services, including sales personnel salaries, advertising, and office rent.

Period Costs

Costs that are not directly tied to the production process and are expensed in the period they are incurred, such as selling, general, and administrative expenses.

Administrative Costs

Expenses related to the general administration of a business, including salaries of executives, office supplies, and legal and accounting services.