   Chapter 5, Problem 6P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

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? Summary Introduction 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. Explanation 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,

FVAnnuity=C×((1+I)N1I)

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. FVAnnuity=$300×((1+0.07)510.07)=$300×5.750=$1,725.00

The future value of the annuity is \$1725.00.

Calculate the future value of an annuity due

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