Question

Suppose you are going to receive $10,000 per year for 6 years. The appropriate interest rate is 11 percent.

Suppose you plan to invest the payments for 6 years, what is the future value if the payments are an ordinary annuity?

    

d.	Suppose you plan to invest the payments for 6 years, what is the future value if the payments are an annuity due?

Answer 1

Using the FV function in excel, we can find the future value of an annuity.

If its an ordinary annuity, the payment is made at the end of the period.

For ordinary annuity,

PMT or periodic payment = $10000

N/NPER or number of periods = 6 years

Rate or interest rate per period = 11%,

FV or future value = (Rate, NPER, PMT, PV, Type) = (11%, 6, 10000, 0, 0) = $79128.60 (Ordinary annuity)

Note: PV or present value is not applicable in this case as there are periodic payments i.e. PMT. Type is 0 as payments are made at end of the period.

If its an annuity due, the payment is made at the beginning of the period.

FV or future value = (Rate, NPER, PMT, PV, Type) = (11%, 6, 10000, 0,1) = $87832.74 (Annuity Due)

Note: PV or present value is not applicable in this case as there are periodic payments i.e. PMT. Type is 1 as payments are made at the beginning of the period.