Question

You are trying to prepare a budget based upon the amount of cash flow that you will have available 5 years from now. You are initially promised a regular annuity of $50 with the first payment to be made 1 year from now and the last payment 5 years from now. However, you are actually going to receive an annuity due with the same number of payments but where the first payment is to begin immediately. How much (or less) cash will you have 5 years from now based upon that error if the rate to invest funds is 10%?

Answer 1

We need to use FV function in EXCEL to find the future value

=FV(rate,nper,pmt,pv,type)

In both the cases, all values remain same except type. For the annuity end of the year, type=0 and for annuity at the begining of the year, type=1

rate=10%

nper=number of periods=5

pmt=annuity payments=50

pv=0

i) annuity made at the end of the year

=FV(10%,5,-50,0,0)

FV=305.26

The future value=305.26

ii) annuity made at the begining of the year

=FV(10%,5,-50,0,1)

FV=335.78

You will have 30.53 (335.78-305.26) extra because of the payments in the begining of the year