Question

Problem 5-6 Future value: annuity versus annuity due a. What's the future value of a 8%, 5-year ordinary annuity that pays $100 each year? Round your answer to the nearest cent. b. If this was an annuity due, what would its future value be? Round your answer to the nearest cent.

Answer 1

a.

Future Value

$ 586.66

Working:

i.

Future Value of ordinary annuity of 1

=

(((1+i)^n)-1)/i

Where,

=

(((1+0.08)^5)-1)/0.08

i

8%

=

5.867

n

5

ii.

Future Value of ordinary annuity of $ 100

=

$              100

x

5.867

=

$        586.66

b.

Future Value

$ 633.59

Working:

i.

Future Value of annuity due of 1

=

((((1+i)^n)-1)/i)*(1+i)

Where,

=

((((1+0.08)^5)-1)/0.08)*(1+0.08)

i

8%

=

6.336

n

5

ii.

Future Value of annuity due of $ 100

=

$              100

x

6.336

=

$        633.59