You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

To determine which annuity is better, we need to compare the present value of the cash flows for each annuity.

An ordinary annuity is one where the cash flows occur at the end of each period, while an annuity due is one where the cash flows occur at the beginning of each period.

To calculate the present value of the cash flows, we can use the present value of an annuity formula. The formula for the present value of an ordinary annuity is:

PV = CF \* [(1 - (1 + r)^(-n)) / r]

where PV is the present value, CF is the cash flow per period, r is the discount rate (or interest rate), and n is the number of periods.

The formula for the present value of an annuity due is:

PV = CF \* [(1 - (1 + r)^(-n)) / r] \* (1 + r)

Now, let's calculate the present value of the cash flows for each annuity.

For the ordinary annuity, the cash flows occur at the end of each period, so CF = $5,000, n = 10, and the discount rate is the same for both annuities (let's assume it is 5% for this example).

PV_ORD = $5,000 \* [(1 - (1 + 0.05)^(-10)) / 0.05]
PV_ORD ≈ $39,402.54

For the annuity due, the cash flows occur at the beginning of each period, so CF = $5,000, n = 10, and the discount rate is the same (5%).

PV_DUE = $5,000 \* [(1 - (1 + 0.05)^(-10)) / 0.05] \* (1 + 0.05)
PV_DUE ≈ $41,372.66

Comparing the two present values, we can see that the annuity due has a higher present value. Therefore, the statement "Investment DUE is an annuity due" is correct. The annuity due will provide a higher present value of cash flows, making it the better investment option.