Question

1. What is the Future Value of an asset that pays five cash flows of $1.2 million per year starting today?  The required rate of return is 10% p.a.  

1. $6.33 Million
2. $6.23 Million
3. $7.33 Million
4. $7.23 Million
5. None of the above

*The Correct Answer is C, I just need the mathematical calculations for the answer, Thanks

Answer 1

Future Value of an Annuity Due

Future Value of an Annuity Due is calculated by using the following Formula

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

Annual Payment = $1.20 Million per year

Interest rate (r) = 10% per year

Number of years (n) = 5 Years

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

= (1 + 0.10) x $1.20 Million x [{(1 + 0.10)⁵ – 1} / 0.10]

= 1.10 x $1.20 Million x [(1.61051 – 1) / 0.10]

= 1.10 x $1.20 Million x [0.61051 / 0.10]

= 1.10 x $1.20 Million x 6.1051

= $7.33 Million

“Therefore, the Future Value of an Annuity = $7.33 Million”