Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE What's the future value of a 7%. 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be?
To determine: The future value of the annuity and the future value of an annuity due.
Annuity: An annuity refers to the fixed cash flows that are received or paid by a person at defined intervals. This series of cash flows occur for a given time period. The two kinds of annuities are the annuities having a fixed rate and annuities having a variable rate. The payment of annuities is made at the end of the year.
Annuity Due: The annuity due refers to the fixed cash flows that are received or paid by a person at defined intervals. It is same as annuity but the annuity due is paid at the beginning of the year.
Solution:
Given,
The monthly payment is $300.
The rate of interest is 7%.
The time period is 5 years.
Calculate the future value of an annuity.
The formula to calculate the future value of the annuity is,
Where,
- FV is the future value.
- C is the monthly payment.
- I is the interest rate.
- N is the time period.
Substitute $300 for C, 5 for N and 7% for I.
The future value of the annuity is $1725.00.
Calculate the future value of an annuity due
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