Question

If you start making $50 monthly contributions today and continue them for five years, what’s their future value if the compounding rate is 10 percent APR?

What is the present value of this annuity?

Answer 1

1.Information provided:

Monthly contribution= $50

Time= 5 years*12 = 60 months

Interest rate= 10%/12 = 0.8333%

The question is concerning finding the future value of an annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This can be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

Enter the below in the financial calculator in BGN mode:

PMT= -50

N= 60

I/Y= 0.8333

Press the CPT key and FV to compute the future value of the ordinary annuity.

The value obtained is 3,904.08.

Therefore, the future value of annuity due is $3,904.08.

2.Enter the below in a financial calculator to calculate the present value of the annuity:

PMT= -50

N= 60

I/Y= 0.8333

Press the CPT and PV to compute the present value.

The value obtained is 2,372.88.

Therefore, the present value of the annuity is $2,372.88.