Question

Problem 4-6
Future Value: Ordinary Annuity versus Annuity Due

What is the future value of a 8%, 5-year ordinary annuity that pays $650 each year? Round your answer to the nearest cent.
$   

If this were an annuity due, what would its future value be? Round your answer to the nearest cent.
$   

Answer 1

Annual Payment = $650
Number of Payments = 5
Interest Rate = 8%

Answer a.

Future Value = $650*1.08^4 + $650*1.08^3 + $650*1.08^2 + $650*1.08 + $650
Future Value = $650 * (1.08^5 - 1) / 0.08
Future Value = $650 * 5.866601
Future Value = $3,813.29

Answer b.

Future Value = $650*1.08^5 + $650*1.08^4 + $650*1.08^3 + $650*1.08^2 + $650*1.08
Future Value = $650 * 1.08 * (1.08^5 - 1) / 0.08
Future Value = $650 * 6.335929
Future Value = $4,118.35