1. Under a company savings plan, a worker contributes $250 a month to an ordinary annuity paying...
Question:
1. Under a company savings plan, a worker contributes $250 a month to an ordinary annuity paying 6%, compounded monthly. Calculate the annuity's worth in 35 years.
2. You are planning to buy a car in 3 years. So you pay $250 each month into an account that pays 4% annual interest, compounded monthly. Find the present value of the annuity.
Present Value of an Annuity:
An equal amount of cash flow that occurs at specified time intervals is called an annuity. There are two major forms of annuity:
- Ordinary annuity - cash flows occur at the end of the end of the period
- Annuity due - cash flows occur at the start of the period.
To determine the present value of an annuity the time value of money factor is applied to discount the annuity.
Answer and Explanation: 1
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How to Calculate the Present Value of an Annuity
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Chapter 8 / Lesson 3
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Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.
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