Chapter 4, Problem 16PROB

Summary Introduction

The annual cash flows for year 1 is $500; year 2 is $400; and year 3 is $300. The opportunity cost is 7.5%.

Future value of an annuity is the total future value of a series of periodic payments made at the end of each year at a given interest rate for a specified period.

$FV=\left[\left(PMT\times {\left(1+r\right)}^{n-1}\right)+\left(PMT\times {\left(1+r\right)}^{n-2}\right)+\left(PMT\times {\left(1+r\right)}^{n-3}\right)\right]$

Future value of an annuity due is the total future value of a series of periodic payments made at the beginning of each year at a given interest rate for a specified period.

$FV=\left[\left(PMT\times {\left(1+r\right)}^{n-0}\right)+\left(PMT\times {\left(1+r\right)}^{n-1}\right)+\left(PMT\times {\left(1+r\right)}^{n-2}\right)\right]$

Here,

The future value is “FV”.

The annual payment on investment is “PMT”.

The interest rate is “r”.

The maturity period is “n”.