Question

Future value: annuity versus annuity due

1. What's the future value of a 8%, 5-year ordinary annuity that pays $600 each year? Round your answer to the nearest cent.
2. If this was an annuity due, what would its future value be? Round your answer to the nearest cent.

Answer 1

a)Future value =Amount * FVA8%,5

                       = 600 * 5.86660

                       = $ 3519.96

In case of ordinary annuity ,investments are made at end of period/year .Therefore amount remains invested for the period n-1

Find future value annuity factor from future value annuity(ordinary) table at 8% for 5 period or using financial calculator where n=5 ,i = 8%,PMT =1

b)Future value =Amount * FVAD8%,5

                       = 600 *6.33593

                      = $ 3801.56

In case of annuity due ,investments are made at beginning of period/year .Therefore amount remains invested for the period n

Find future value annuity factor from future value annuity(due) table at 8% for 5 period