Future value of an ordinary annuity Robert Hobbes plans to i

Future value of an ordinary annuity: Robert Hobbes plans to invest $25,000 a year at the end of each year for the next seven years in an investment that will pay him a rate of return of 11.4 percent. How much money will Robert have at the end of seven years? Please explain in detail

Solution

Formula for future value of ordinary annuity is:

FV = P x [(1+r) ⁿ- 1 /r]

P = periodic cash flow = $ 25,000

r = Rate of interest = 11.4 % or 0.114

n = No. of periods = 7

Substituting all the values in above formula, we get FV as:

FV = $ 25,000 x [(1+0.114)⁷ – 1/0.114]

     = $ 25,000 x [(1.114)⁷ – 1/0.114]

    = $ 25,000 x [(2.129101– 1/0.114]

    = $ 25,000 x (1.129101/0.114)

    = $ 25,000 x 9.904398

    = $ 247,609.95

Robert will have $ 247,609.95 at the end of seven years.