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Calculate the Future Value of an Annuity:
Annuity is stated as periodic payment every period for a number of periods. This periodic payment is the same each year only then it could be known as an annuity. Compound value (future value) of this annuity can be computed by using a different formula:
Here A is the constant periodic cash flow (annuity), i is the rate of return for one period and n is the number of time periods. Term within the brackets is the compound value factor of an annuity. We may also use the tables given at the end of the text book to calculate compound values of the cash flows and formula would change to:
Future Value = Annuity * (Future Value Annuity Factorn,i)
Extending the same illustration we used above, if we were going to pay 7000 $each year for the next 20 years what is the value at the end of 20 years if interest rate was 5 % compounded annually.
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