State the formulae for present value and future value of an annuity.
Ans. The present value (PV) formula has four variables, each of which can be solved for:
PV is the value at time = 0
FV is the value at time = n
i is the discount rate, or the interest rate at which the amount will be compounded each period n is the number of periods (not necessarily an integer). The cumulative present value of future cash flows can be calculated by summing the contributions of FVt , the value of cash flow at time t
Future value of a present sum. The future value (FV) formula is similar and uses the same variables.
Future value of an annuity. The future value of an annuity (FVA) formula has four variables, each of which can be solved for:
FV (A) = A (1 ) –1 n i i FV(A) is the value of the annuity at time = n A is the value of the individual payments in each compounding period. i is the interest rate that would be compounded for each period of time n is the number of payment periods To get the FV of an annuity due, multiply the above equation by (1 + i).
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