Future Value: Ordinary Annuity versus Annuity Due
1.What is the future value of a 10%, 5-year ordinary annuity that pays $800 each year? Round your answer to the nearest cent.
2. If this were an annuity due, what would its future value be? Round your answer to the nearest cent.
a. | ||||||
Future value | = | Annual cash flow | * | Future value of annuity of 1 | ||
= | $ 800.00 | * | 6.1051 | |||
= | $ 4,884.08 | |||||
Working: | ||||||
Future value of annuity of 1 | = | (((1+i)^n)-1)/i | Where, | |||
= | (((1+0.10)^5)-1)/0.10 | i | = | 10% | ||
= | 6.1051 | n | = | 5 | ||
b. | ||||||
Future value | = | Annual cash flow | * | Future value of annuity of 1 | ||
= | $ 800.00 | * | 6.71561 | |||
= | $ 5,372.49 | |||||
Working: | ||||||
Future value of annuity of 1 | = | ((((1+i)^n)-1)/i)*(1+i) | Where, | |||
= | ((((1+0.10)^5)-1)/0.10)*(1+0.10) | i | = | 10% | ||
= | 6.71561 | n | = | 5 |
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