Question

What's the future value of a 7%, 5-year ordinary annuity that pays $800 each year? If this was an annuity due, what would its future value be? Do not round intermediate calculations. Round your answers to the nearest cent.

Future Value of an Ordinary Annuity: $  

Future Value of an Annuity Due: $  

Answer 1

Answer : Future value of Ordinary Annuity :

Future value of Annuity = Periodic payment * {[( 1 + r)^n - 1 ] / r }

where

Periodic payment is 800

r is the rate of interest per period i.e 7% or 0.07

N is the number of years i.e 5

Future value of Annuity = 800 * {[( 1 + 0.07)^5 - 1 ] / 0.07 }

= 800 * {[1.4025517307 - 1 ] / 0.07}

= 800 * 5.75073901

= 4600.591208 or 4600.59

Future value of Annuity Due :

Future value of Annuity = Periodic payment * {[( 1 + r)^n - 1 ] / r } * (1 + r)

where

Periodic payment is 800

r is the rate of interest per period i.e 7% or 0.07

N is the number of years i.e 5

Future value of Annuity Due = 800 * {[( 1 + 0.07)^5 - 1 ] / 0.07 } * (1 + 0.07)

= 800 * {[1.4025517307 - 1 ] / 0.07} * (1 + 0.07)

= 800 * 5.75073901 * 1.07

= 4922.63259256 or 4922.63