Derivation of Formulas
i) Future Value of an Annuity
Future value of an annuity is
FVAn = A(1 + k)n -1 + A (1 + k)n - 2 + .......A (1 + k) + A ...............(a1)
Multiplying both sides of the equation a1 by (1 + k) gives.
(FVAn) (1 + k) = A (1 + k)n +A(1 +k)n -1 +... A (1 +k)2 +A (1 +k) .......(a2)
Subtracting eq. (a1) from eq. (a2) yields
FVAnk = A[((1 + k)n - 1)/k] ......................................(a3)
Dividing both sides of eq. (a3) by k yields
FVAn = A[((1 + k)n - 1)/k]
ii) Present Value of an Annuity
The present value of an annuity as:
PVAnk = A (1 + k)-1 + A(1 + k)-2 + .... + A(1 + k)- n ............(a 4)
Multiplying both sides of Eq (a 4) by (1+ k) provides:
PVAn (1 + k) = A + A (1 + k)-1 + ...... + A (1 + k)-n +1 .....................(a5)
Subtracting eq (a4) by (a5) yields:
PVAnk = A[1 - (1 + k)-n]
= A [((1 + k)]n - 1)/(k (1 + k)n) .....................(a6)
Dividing both the sides of Eq (a6) with k outcomes in as:
PVAn = A [((1 + k)]n - 1)/(k (1 + k)n)