Categories: Finance

Future Value of Annuity

The future annuity actually explains the worth of certain collected payment after the streamlined payment schedule in the future, when all payments are made. The future annuity actually measures the additional interest not only for the amount paid but also to those values of capital that is borrowed from the bank or leasing agency, so assets and liabilities both are included in this context. The payment amount that is PMT can be can also be calculated from the above equation by making certain rearrangements in the above equation to reach the desired future value either by the depositor or the buyer.

Example of FV of Annuity

The future value of annuity works exceptionally well while computing the values for ordinary future annuity in which the composite fraction is to be calculated at the end of payment sessions. For instance if some one is investing or borrowing $30 each year for four years and wants to be illustrated for the compounded value each year at the interest of 10% for the specified set of years, then future value of annuity would be employed through the described formula.

The values would be input in the formula as PMT = 30.00, i = 0.1, n= 4, the computation would be as follows;

FV = PMT [((1 + i)ⁿ – 1) / i] = 30.00((1+0.1)³ – 1/0.1) = $99.33

The accumulated value for $30 after three years at 10% interest would be $99.33 for the depositor or borrower, what ever the case may be. The above calculations evidently clears that future value for payment sum of $90 is bigger than that by $9.33. The interest for all the payments is made at the time of deposition except the last one. For the first years for instance the power of three would be converted to two and profit of two years would be earned that would be $36.3. The last year profit would be just for one installment that would be $ 33. in this way each year’s profit or interest can be calculated systematically.