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Practice Annuity Handout

The document explains the concepts of annuities, including ordinary annuities and annuities due, along with their formulas for calculating future value (FV) and present value (PV). It provides practice problems and their solutions to illustrate the calculations involved in different scenarios. Key variables include payment per period, interest rate, and total number of periods.

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9 views2 pages

Practice Annuity Handout

The document explains the concepts of annuities, including ordinary annuities and annuities due, along with their formulas for calculating future value (FV) and present value (PV). It provides practice problems and their solutions to illustrate the calculations involved in different scenarios. Key variables include payment per period, interest rate, and total number of periods.

Uploaded by

sadia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Present Value and Future Value of Annuities

Annuity: A series of equal payments made at regular intervals.


1. Ordinary Annuity: Payments are made at the end of each period.
2. Annuity Due: Payments are made at the beginning of each period.

Formulas:
1. Future Value (FV):
- Ordinary Annuity:

FV = A ×
( ( 1+r )n−1 )
r
- Annuity Due:

FV = A ×
( ( 1+r )n−1 )
×(1+r )
r
2. Present Value (PV):
- Ordinary Annuity:

PV =
A×
( 1−
1
(1+ r )n )
r
- Annuity Due:

PV =
A×
( 1−
1
)
(1+ r )n × (1 + r)
r
Where:
P: Payment per period
r: Interest rate per period
n: Total number of periods

Practice Problems

Example 1: You deposit $1,000 at the end of each year for 5 years at an annual interest
rate of 6%. Calculate the future value.
Example 2: You want to find the present value of receiving $500 at the beginning of
each year for 3 years, assuming a monthly interest rate of 1%.
(Hint: Yearly interest= 12%)
Example 3: A person deposits $2,000 annually for 6 years at 5% interest:
a. If deposited at the end of each year (ordinary annuity), what is the future value?
b. If deposited at the beginning of each year (annuity due), what is the future value?

Example 4: Calculate the future value of depositing $300 at the end of each year for 8
years at an annual interest rate of 4%.

C. Mixed Problems
1. A retiree wants to withdraw $3,000 annually for 20 years from their retirement
account, starting immediately. The account earns 6% interest annually. How much
should they have saved?
2. How much must be deposited annually for 12 years to achieve a future value of
$100,000 at an annual interest rate of 5%?

Answer Values

Example 1: $5,637.09
Example 2: $1,345.03
Example 3a: $13,603.83
Example 3b: $14,284.02
Example 4: $2,764.27
Mixed Problem 1: $36,474.35
Mixed Problem 2: $6,282.54

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