Future value of annuity

What is the future value (as of 10 years from now) of an annuity that makes 10 annual payments of Rs. 5,000, if the interest
rate is 7% per year compounded quarterly?

Solution: 

Answer: Rs. 286,170.67

Future value of an annuity

Suppose that you start a savings plan by depositing Rs. 1,000 at the beginning of every year into an account that offers 8% per
year. If you make the first deposit today, and then three additional ones, how much will have accumulated after four years?
Solution: 

Example 1: Mr A deposited $700 at the end of each month of calendar year 20X1 in an investment account of 9% annual
interest rate. Calculate the future value of the annuity on Dec 31, 20X1. Compounding is done on monthly basis.

Solution

Problem 5: Present value of ordinary annuity

Mr. Mohammad Ali has received a job offer from a large investment bank as an accountant.  His base salary will be $35,000
constant to date of retirement.  He will receive his first annual salary payment one year from the day he begins to work.   In
addition, he will get an immediate $10,000 bonus for joining the company.   Mr. Ali is expected to work for 25 years. What is
the present value of the offer if the discount rate is 12 percent?

Solution: 

PVA25 = 274,509.87
Bonus = 10,000
Answer: $284,509.87
Option A

Problem 10: Present value of 0rdinary annuity formula application

You have won the lottery!  The lottery officials offer you two choices for collecting your winnings.  You may take four payments
of $250,000 over the next four years or, you may take a one-time payment of $750,000 today.  Which would you take?
Solution: 

Answer: $792,466.36
 Option A
If $2000 is invested today at a 12% nominal interest rate, how much will it be worth in 15 years if interest is compounded
a. Annually
b. Quarterly
c. Monthly
d. Daily (365-days per year)

Find the interest rates implied by each of the following:

a. You borrow $1500 today and promise to repay the loan by making a single payment of $2114.00 in 5 years.
b. You invest $500 today and receive a promise of receiving back $193.50 for each of the next 4 years.

PROBLEM 2

PART 2A

Step 1: 5 N
Step 2: 2114 FV
Step 3: -1500 PV
Step 4: 0 PMT
Step 5: I/Y ⇒ 7.10%

PART 2B

Step 1: 4 N
Step 2: 0 FV
Step 3: -500 PV
Step 4: 193.50 PMT
Step 5: I/Y ⇒ 20.10%

The present value of $15,000 to be received in 5 years, discounted at the annual rate 12%, is

https://businessfinanceessentials.pressbooks.com/chapter/chapter-three-time-value-of-money-2/
Name:___________________________________ Name:___________________________________

1. What is the future value (as of 10 years from now) of an 1. What is the future value (as of 10 years from now) of an
annuity that makes 10 annual payments of 5,000, if the annuity that makes 10 annual payments of 5,000, if the
interest rate is 7% per year-compounded quarterly? interest rate is 7% per year-compounded quarterly?

2. Suppose that you start a savings plan by depositing 2. Suppose that you start a savings plan by depositing
1,000 at the beginning of every year into an account that 1,000 at the beginning of every year into an account that
offers 8% per year. If you make the first deposit today, and offers 8% per year. If you make the first deposit today, and
then three additional ones, how much will have then three additional ones, how much will have
accumulated after four years? accumulated after four years?

3. Mr A deposited 700 at the end of each month of 3. Mr A deposited 700 at the end of each month of
calendar year 20X1 in an investment account of 9% annual calendar year 20X1 in an investment account of 9% annual
interest rate. Calculate the future value of the annuity on interest rate. Calculate the future value of the annuity on
Dec 31, 20X1. Compounding is done on monthly basis. Dec 31, 20X1. Compounding is done on monthly basis.

4. Mr. Mohammad Ali has received a job offer from a large 4. Mr. Mohammad Ali has received a job offer from a large
investment bank as an accountant.  His base salary will be investment bank as an accountant.  His base salary will be
35,000 constant to date of retirement.  He will receive his 35,000 constant to date of retirement.  He will receive his
first annual salary payment one year from the day he first annual salary payment one year from the day he
begins to work.  In addition, he will get an immediate begins to work.  In addition, he will get an immediate
10,000 bonus for joining the company.   Mr. Ali is expected 10,000 bonus for joining the company.   Mr. Ali is expected
to work for 25 years. What is the present value of the offer to work for 25 years. What is the present value of the offer
if the discount rate is 12 percent? if the discount rate is 12 percent?
5. You have won the lottery!  The lottery officials offer you 5. You have won the lottery!  The lottery officials offer you
two choices for collecting your winnings.  You may take two choices for collecting your winnings.  You may take
four payments of 250,000 over the next four years or, you four payments of 250,000 over the next four years or, you
may take a one-time payment of 750,000 today.  Which may take a one-time payment of 750,000 today.  Which
would you take? would you take?

6. Find the interest rates implied by each of the following: 6. Find the interest rates implied by each of the following:
a. You borrow 1500 today and promise to repay the loan a. You borrow 1500 today and promise to repay the loan
by making a single payment of 2,114.00 in 5 years. by making a single payment of 2,114.00 in 5 years.
b. You invest 500 today and receive a promise of receiving b. You invest 500 today and receive a promise of receiving
back 193.50 for each of the next 4 years. back 193.50 for each of the next 4 years.

Basic Long-Term Financial Concepts Basic Long-Term Financial Concepts

Formulas: Formulas:
Simple Interest Simple Interest
Interest = P x r x T Interest = P x r x T
Compound Interest Compound Interest

Effective Annual Rate (EAR) Effective Annual Rate (EAR)

Present Value and Future Value Present Value and Future Value

Future Value of an Ordinary Annuity Future Value of an Ordinary Annuity

Present of an Ordinary Annuity

Present of an Ordinary Annuity