Question

A family saves for a car by depositing $800 each quarter into an annuity that pays 6% compounded quarterly. Find the future value of the annuity at the end of the three years?

Answer 1

Future Value of an Ordinary Annuity

Here, we’ve quarterly deposit (P) = $800

Quarterly interest rate (r) = 1.50% [6.00% / 4 Quarters]

Number of periods (n) = 12 Years [3 Years x 4 Quarters]

Therefore, Future Value of an Ordinary Annuity = P x [{(1+ r)ⁿ - 1} / r ]

= $800 x [{(1 + 0.0150)¹² - 1} / 0.0150]

= $800 x [(1.195618171 – 1) / 0.0150]

= $800 x [0.195618171 / 0.0150]

= $800 x 13.04121143

= $10,432.97

Hence, the Future Value of the Ordinary annuity will be $10,432.97