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    Examples Future Value Annuity

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    kenetic01
    1) The document provides examples of calculating the future value of annuities using annuity formulas. Annuities provide a series of regular cash flows over a period of time. The future value formula allows calculating the total value of all cash flows received from an annuity by taking into account the interest rate and number of periods. 2) Example problems calculate the future value of annuities with different interest rates, payment amounts, periods, and timing of payments. Information given includes the periodic payment amount, number of periods, and interest rate per period. The future value formula is applied to calculate the total accumulated value at the end of the annuity period. 3) Examples include annuities with monthly,

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    Examples Future Value Annuity

    Uploaded by

    kenetic01
    282 views5 pages
    1) The document provides examples of calculating the future value of annuities using annuity formulas. Annuities provide a series of regular cash flows over a period of time. The future value formula allows calculating the total value of all cash flows received from an annuity by taking into account the interest rate and number of periods. 2) Example problems calculate the future value of annuities with different interest rates, payment amounts, periods, and timing of payments. Information given includes the periodic payment amount, number of periods, and interest rate per period. The future value formula is applied to calculate the total accumulated value at the end of the annuity period. 3) Examples include annuities with monthly,

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    1) The document provides examples of calculating the future value of annuities using annuity formulas. Annuities provide a series of regular cash flows over a period of time. The future value formula allows calculating the total value of all cash flows received from an annuity by taking into account the interest rate and number of periods. 2) Example problems calculate the future value of annuities with different interest rates, payment amounts, periods, and timing of payments. Information given includes the periodic payment amount, number of periods, and interest rate per period. The future value formula is applied to calculate the total accumulated value at the end of the annuity period. 3) Examples include annuities with monthly,

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    282 views5 pages

    Examples Future Value Annuity

    Uploaded by

    kenetic01
    1) The document provides examples of calculating the future value of annuities using annuity formulas. Annuities provide a series of regular cash flows over a period of time. The future value formula allows calculating the total value of all cash flows received from an annuity by taking into account the interest rate and number of periods. 2) Example problems calculate the future value of annuities with different interest rates, payment amounts, periods, and timing of payments. Information given includes the periodic payment amount, number of periods, and interest rate per period. The future value formula is applied to calculate the total accumulated value at the end of the annuity period. 3) Examples include annuities with monthly,

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    of 5

    Example 1

    assume that you are receiving $1,000 every year for the next five years, and you invested
    each payment at 5%. Draw a diagram

    Since we h
    ave to add the future value
    of each payment, you may have noticed that if you have an ordinary annuity with many cash
    flows, it would take a long time to calculate all the future values and then add them together.
    Fortunately, mathematics provides a formula that serves as a shortcut for finding the
    accumulated value of all cash flows received from an ordinary annuity:

    = $1000*[5.53]= $5525.63
    Example 2

    assuming a discount rate of 6%, the future value of an annuity that pays $1,000 per year for
    five years is $4,212 (1,000*[(1+0.06)5-1/0.06]=5,637). This means that if you could get a
    return on your invested funds of 6% per year, providing an annuity of $1,000 per year would
    be worth $637 ($5,637-$5,000) more to the issuer than giving a lump sum.
    Example 3: Mr A deposited $700 at the end of each month of calendar year 2010 in an
    investment account of 9% annual interest rate. Calculate the future value of the annuity on
    Dec 31, 2011. Compounding is done on monthly basis.
    Solution

    We have,
    Periodic Payment
    Number of Periods

    R = $700
    n = 12

    Interest Rate

    i = 9%/12 = 0.75%

    Future Value

    PV = $700 {(1+0.75%)^12-1}/1%
    = $700 {1.0075^12-1}/0.01

    $700 (1.0938069-1)/0.01 $700 0.0938069/0.01 $700


    9.38069 $6,566.48
    Example 4
    Calculate the future value of 12 monthly deposits of $1,000 if each payment is made on the first day
    of the month and the interest rate per month is 1.1%. Also calculate the total interest earned on the
    deposits if the whole amount is withdrawn on the last day of 12th month.
    Solution

    Periodic Payment

    = $1,000

    Number of Periods

    = 12

    Interest Rate

    = 1.1%

    Future Value

    = $1,000 {(1+1.1%)^12-1}/1.1% (1+1.1%)


    = $1,000 {1.011^12-1}/0.011 (1+0.011)
    = $1,000 (1.140286-1)/0.011 1.011
    $1,000 0.140286/0.011 1.011
    $1,000 12.75329059 1.011
    $12,893.58

    Interest Earned

    $12,893.58 - $1,000 12
    $893.58

    Example 5
    Suppose you want to save money for your childs college expenses. Let suppose you
    deposit $1000 at the beginning of each year, for 18 years, at an interest rate of 5%
    How much is available for your child when he/she starts school
    FV = $1000 {(1+0.05)^18-1}/0.05 x (1 + 0.05)
    = $1000 x {(1.05)^18-1}/0.05 x (1.05)
    = $1000 x {2.406619-1}/0.05 x (1.05)
    = $1000{28.13238}(1.05)
    =(28.13238)(1.05)
    =29538.999
    =$29539.00
    Investment
    18 x $1000
    = $18000
    Example 6
    Calculate the future value of 12 monthly deposits of $1,000 if each payment is made on the first day
    of the month and the interest rate per month is 1.1%. Also calculate the total interest earned on the
    deposits if the whole amount is withdrawn on the last day of 12th month.
    Solution

    Periodic Payment

    = $1,000

    Number of Periods

    = 12

    Interest Rate

    = 1.1%

    Future Value

    = $1,000 {(1+1.1%)^12-1}/1.1% (1+1.1%)


    = $1,000 {1.011^12-1}/0.011 (1+0.011)
    = $1,000 (1.140286-1)/0.011 1.011
    $1,000 0.140286/0.011 1.011

    $1,000 12.75329059 1.011


    $12,893.58
    Interest Earned

    $12,893.58 - $1,000 12
    $893.58

    Example 7
    : Mr A deposited $700 at the end of each month of calendar year 2010 in an investment account of
    9% annual interest rate. Calculate the future value of the annuity on Dec 31, 2011. Compounding is
    done on monthly basis.
    Solution

    We have,
    Periodic Payment

    = $700

    Number of Periods

    = 12

    Interest Rate

    = 9%/12 = 0.75%

    Future Value

    PV

    = $700 {(1+0.75%)^12-1}/1%
    = $700 {1.0075^12-1}/0.01
    $700 (1.0938069-1)/0.01
    $700 0.0938069/0.01
    $700 9.38069
    $6,566.48

    Example 8
    the treasurer of ABC Imports expects to invest $50,000 of the firm's funds in a long-term investment
    vehicle at the beginning of each year for the next five years. He expects that the company will earn
    6% interest that will compound annually. The value that these payments should have at the end of the
    five-year period is calculated as:
    P = ($50,000 [((1 + .06)5 - 1) / .06])(1 + .06)

    P = $298,765.90

    Example 9

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