FUTURE VALUE OF AN ANNUITY - Accounts and Finance for Managers

• Annuity may be a series of either payments or receipts
• The annuity can be classified into two categories

Annuity at the end of the period- Regular / Deferred Annuity
Annuity at the beginning of the period - Annuity Due
Annuity at the end of the period

Illustration

Suppose you deposit Rs.1,000 annually in a bank for 5 years and your deposits earn a compound interest rate of 10% What will be value of the deposit at the end of 5 years? Assuming the each deposit occurs at the end of the year, the future value of this annuity?

Future Value of Annuity Due

Illustration

If you invest Rs 1,000 at the beginning of every year, for four years. What will be the value of the investment finally.

Sinking Fund Factor Method

It means that the amount to be deposited at the end of every year for the period of "n" years at the rate of interest "K" in order to aggregate Re.1 at the end of the period.
A = FVA [K/(1+K)n -1]

Illustration

How much you should save annually to accumulate Rs.20,000 by the end of 10 years. If the saving earns an interest of 12 %?
A = Rs.20,000[.12/(1+.12)10 -1]
= Rs.20,000(.05698)=Rs.1,139

The next most important segment is present value of money. First we will discuss the present value of single cash flow