Question

Please use formulas and hand-work, it helps me better understand as I cannot use excel

Problem 2 What are the present value and future value of S900 to be received at the END of each year for the next 5 years if the discount/compounding is 7%?

Answer 1

Annual Payment = $900
Interest Rate = 7%
Number of Payments = 5

Present Value = Payment / (1 + Interest Rate)^Period

Present Value of Annuity = $900/1.07 + $900/1.07^2 + $900/1.07^3 + $900/1.07^4 + $900/1.07^5
Present Value of Annuity = $900 * (1 - (1/1.07)^5) / 0.07
Present Value of Annuity = $900 * 4.10020
Present Value of Annuity = $3,690.18

Future Value = Payment * (1 + Interest Rate)^Period

Future Value of Annuity = $900*1.07^4 + $900*1.07^3 + $900*1.07^2 + $900*1.07 + $900
Future Value of Annuity = $900 * (1.07^5 - 1) / 0.07
Future Value of Annuity = $900 * 5.75074
Future Value of Annuity = $5,175.67