Example 1

assume that you are receiving $1,000 every year for the next five years, and you invested
each payment at 5%. Draw a diagram

Since we h
ave to add the future value
of each payment, you may have noticed that if you have an ordinary annuity with many cash
flows, it would take a long time to calculate all the future values and then add them together.
Fortunately, mathematics provides a formula that serves as a shortcut for finding the
accumulated value of all cash flows received from an ordinary annuity:

= $1000*[5.53]= $5525.63
Example 2

assuming a discount rate of 6%, the future value of an annuity that pays $1,000 per year for
five years is $4,212 (1,000*[(1+0.06)5-1/0.06]=5,637). This means that if you could get a
return on your invested funds of 6% per year, providing an annuity of $1,000 per year would
be worth $637 ($5,637-$5,000) more to the issuer than giving a lump sum.
Example 3: Mr A deposited $700 at the end of each month of calendar year 2010 in an
investment account of 9% annual interest rate. Calculate the future value of the annuity on
Dec 31, 2011. Compounding is done on monthly basis.
Solution

We have,
Periodic Payment
Number of Periods

R = $700
n = 12

Interest Rate

i = 9%/12 = 0.75%

Future Value

PV = $700 {(1+0.75%)^12-1}/1%
= $700 {1.0075^12-1}/0.01

$700 (1.0938069-1)/0.01 $700 0.0938069/0.01 $700

9.38069 $6,566.48
Example 4
Calculate the future value of 12 monthly deposits of $1,000 if each payment is made on the first day
of the month and the interest rate per month is 1.1%. Also calculate the total interest earned on the
deposits if the whole amount is withdrawn on the last day of 12th month.
Solution

Periodic Payment

= $1,000

Number of Periods

= 12

Interest Rate

= 1.1%

Future Value

= $1,000 {(1+1.1%)^12-1}/1.1% (1+1.1%)

= $1,000 {1.011^12-1}/0.011 (1+0.011)
= $1,000 (1.140286-1)/0.011 1.011
$1,000 0.140286/0.011 1.011
$1,000 12.75329059 1.011
$12,893.58

Interest Earned

$12,893.58 - $1,000 12
$893.58

Example 5
Suppose you want to save money for your childs college expenses. Let suppose you
deposit $1000 at the beginning of each year, for 18 years, at an interest rate of 5%
How much is available for your child when he/she starts school
FV = $1000 {(1+0.05)^18-1}/0.05 x (1 + 0.05)
= $1000 x {(1.05)^18-1}/0.05 x (1.05)
= $1000 x {2.406619-1}/0.05 x (1.05)
= $1000{28.13238}(1.05)
=(28.13238)(1.05)
=29538.999
=$29539.00
Investment
18 x $1000
= $18000
Example 6
Calculate the future value of 12 monthly deposits of $1,000 if each payment is made on the first day
of the month and the interest rate per month is 1.1%. Also calculate the total interest earned on the
deposits if the whole amount is withdrawn on the last day of 12th month.
Solution

Periodic Payment

= $1,000

Number of Periods

= 12

Interest Rate

= 1.1%

Future Value

= $1,000 {(1+1.1%)^12-1}/1.1% (1+1.1%)

= $1,000 {1.011^12-1}/0.011 (1+0.011)
= $1,000 (1.140286-1)/0.011 1.011
$1,000 0.140286/0.011 1.011

 $1,000 12.75329059 1.011

$12,893.58
Interest Earned

$12,893.58 - $1,000 12
$893.58

Example 7
: Mr A deposited $700 at the end of each month of calendar year 2010 in an investment account of
9% annual interest rate. Calculate the future value of the annuity on Dec 31, 2011. Compounding is
done on monthly basis.
Solution

We have,
Periodic Payment

= $700

Number of Periods

= 12

Interest Rate

= 9%/12 = 0.75%

Future Value

PV

= $700 {(1+0.75%)^12-1}/1%
= $700 {1.0075^12-1}/0.01
$700 (1.0938069-1)/0.01
$700 0.0938069/0.01
$700 9.38069
$6,566.48

Example 8
the treasurer of ABC Imports expects to invest $50,000 of the firm's funds in a long-term investment
vehicle at the beginning of each year for the next five years. He expects that the company will earn
6% interest that will compound annually. The value that these payments should have at the end of the
five-year period is calculated as:
P = ($50,000 [((1 + .06)5 - 1) / .06])(1 + .06)

P = $298,765.90

Example 9