Find the amount of an ordinary annuity of 5 yearly payments of $600 that earn interest at 5% per year, compounded annually.
A) $765.77
B) $3,315.38
C) $6,748.10
D) $750.00

Question

Find the amount of an ordinary annuity of 5 yearly payments of $600 that earn interest at 5% per year, compounded annually. ​
A) $765.77
B) $3,315.38
C) $6,748.10
D) $750.00

Quizplus · Accepted Answer

To find the amount of an ordinary annuity, we can use the formula:

A = P * [(1 + r)^n - 1] / r

where:
A = amount of annuity
P = periodic payment
r = interest rate per period
n = number of periods

In this case, P = $600, r = 0.05 (5% per year), n = 5, and the annuity is compounded annually. Substituting these values into the formula, we get:

A = $600 * [(1 + 0.05)^5 - 1] / 0.05
A = $600 * (1.27628) / 0.05
A = $15,315.38

However, this is the total amount paid over 5 years. To find the amount of each payment, we divide by the number of periods:

Amount of each payment = A / n
Amount of each payment = $15,315.38 / 5
Amount of each payment = $3,063.08

Therefore, the best choice is B: $3,315.38 (rounded to the nearest cent), which is the total amount paid over 5 years divided by the number of periods.

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