Chapter 5, Problem 5.8P

To determine

Deferred annuity:

A deferred annuity refers to the annuity which does not make payments immediately. It is a type of annuity contract which makes either monthly contribution to the account over time or leave their money in the account with a belief that it will grow.

Present Value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value. The following formula is used to calculate the present value of an amount:

$\text{Present value of an amount = }\frac{\text{Future value}}{{\left(\text{1 + interest rate}\right)}^{\text{number}\text{of}\text{periods}}}$

Present value of an annuity due:

For the present value of an annuity due, the same formula of an ordinary annuity is used, expected amount of immediate cash flow, which is added to the present value of the future periodic cash flows which are remaining.

To determine: The best alternative that J should choose, assuming that he is able to invest funds at a 7% interest rate.