Question

You own a contract that promises an annuity cash flow of $300 end-of-the-year cash flows for each of the next 5 years. (Note: The first cash flow is exactly 1 year from today). At an interest rate of 8%, what is the future value of this contract exactly 5 years from today?

Answer 1

Answer:$1759.9803

Explanation: Annuities are equally sized cash flows that are paid out/received at equal periods over time. They can either be inflows or outflows. There are 2 types of annuities:

Annuity due - Cash flows that occur at the beginning of each period.

Ordinary Annuity - Cash flows that occur at the end of each period.

For this question an ordinary annuity applies. Using time value of money, the principles in question are:

Payment per period (PMT): The amount paid into/out (inflow or outflow) of a financial stream.

Number of years (n): The total amount of years it takes for an investment to mature.

Interest rate (i): An annual percentage of the oustanding investement, charged as interest.

By inputing values on a financial calculator (Calculator used: HP 10bII+) the following can be deduced:

PMT = $300

n = 5 years

i = 8

Answer: FV = $1759.9803.