Question

Future Value: Ordinary Annuity versus Annuity Due What is the future value of a 3%, 5-year ordinary annuity that pays $800 each year? Round your answer to the nearest cent. $
If this were an annuity due, what would its future value be? Round your answer to the nearest cent. $

Answer 1

Calculation of Future value of ordinary annuity
Future value of ordinary annuity = P x {[(1+r)^n -1]/r}
Future value of ordinary annuity = ?
P = annuity = $800 per year
r = interest rate per year = 3%
n = number of years = 5
Future value of ordinary annuity = 800 x {[(1+0.03)^5 -1]/0.03}
Future value of ordinary annuity = 800 x 5.309136
Future value of ordinary annuity = $4,247.31
Calculation of Future value of annuity due
Future value of annuity due = (1+r) x P {[(1+r)^n -1]/r}
Future value ofannuity due = ?
P = annuity = $800 per year
r = interest rate per year = 3%
n = number of years = 5
Future value of annuity due = (1+0.03) x 800 {[(1+0.03)^5 -1]/0.03}
Future value of annuity due = 1.03 x 4247.31
Future value of annuity due = $4,374.73