how do you calculate annuitySolutionAnnuities are essentiall

how do you calculate annuity?

Solution

Annuities are essentially a series of fixed payments required from you or paid to you at a specified frequency over the course of a fixed time period.

There are two basic types of annuities: ordinary annuities and annuities due.Both are calculated in different manner

For Ordinary annuity: i) Future Value : the future value of an ordinary annuity formula is useful for finding out how much you would have in the future by investing at your given interest rate. If you are making payments on a loan, the future value is useful in determining the total cost of the loan.

Formula : FV = C[ (1+i)^n -1]/i

where C = Cash flow per period

i = interest rate

n = number of payments

Present Value of Annuity :If you would like to determine today\'s value of a future payment series, you need to use the formula that calculates the present value of an ordinary annuity.

Formula :   PV = C[ (1 - (1+i)^-n]/i

where C = Cash flow per period

i = interest rate

n = number of payments