Question

6. Problem 5.06 Click here to read the eBook: Future Value of an Ordinary Annuity Click here to read the eBook: Future Value of an Annuity Due FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE a. What's the future value of a 8%, 5-year ordinary annuity that pays $300 each year? Round your answer to the nearest cent. b. If this was an annuity due, what would its future value be? Round your answer to the nearest cent.

Answer 1

(a) Ordinary annuity, payments are made at end of each period

FV = P(1+r)^n-1 +....+ P(1+r)² + P(1+r) + P = P[(1+r)ⁿ -1]/r

where, Annual Payment = P = $300
Interest Rate = r = 8% = 0.08
Number of Years = n = 5

=> FV = 300(1.08⁵ - 1] /0.08 = $1759.98

(b) Annuity due, payments are made at starting of each period

FV = P(1+r)ⁿ +....+ P(1+r)² + P(1+r) = P [((1 + r)ⁿ - 1) / r])(1 + r)

where, Annual Payment = P = $300
Interest Rate = r = 8% = 0.08
Number of Years = n = 5

=> FV = 300((1.08)⁵ - 1) / 0.08)(1.08) = $1900.78