Question

f. 1. What is the future value of a 3-year, $100 ordinary annuity if the annual interest rate is 4%? 2. What is its present value? 3. What would the future and present values be if it was an annuity due?

Answer 1

f.1. Future Value of Annuity= Annuity Payment * [ {( 1+ Rate of Interest)^Time - 1 } / rate of Interest ]

= $ 100 * [( ( 1+4%)^3-1}/4%]

= $ 312.16

2. Present Value = Cash flows * Present Value of discounting Factor (Rate, time)

= $ 100 * 1/(1.04)^1 +$ 100 * 1/(1.04)^2+$ 100 * 1/(1.04)^3

= $ 277.51

3. Future Value of Annuity Due = Future Value of Annuity * ( 1 + rate of Interest)

= $ 312.16* (1+4%)
= $ 324.65

Present Value of Annuity Due = Present Value of Annuity * (1+rate of interest)

= $ 277.51* (1+4%)

= $ 288.61