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Charles S.

asked • 11/02/12

I have a quastion please.

Find the value of annuity of a =$8000, I = 0.010, n =25

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Aisha S. answered • 11/03/12

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Douglas S.

I'm not quite sure about this.
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11/03/12

Heather L.

Also, Doug, if you look at the link that I provided, you will see the Present Value formulat at the bottom, which is the same as Aisha's but without the multiplication for compounding because it assumes that interest is compounded once per period, as is common practice.

If you don't compound monthly, then PV = 8000*(1 - (1.010)^-25)/0.010 = $176185.25

Unless the person asking the questions wants to clarify further, can we really assume that there are payments being made monthly?  All we know is that there are 25 terms.

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11/03/12

Douglas S. answered • 11/03/12

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Heather L.

The formula that you have used only works if made one payment is ever made.  An annuity is contracted to make regular "rent" payments each period.  The question doesn't state when the interests compounds, or how long the periods are, and it doesn't usually matter because the interest usually compounds at the end of each period on annuities.  Though, unless someone is very wealthy it's hard to see that they would put more than $8000 in more than once or twice a year. 

The formula for an ordinary annuity is FV(future value) = a*((1+I)^n - 1)/I

Plugging all this in: FV = $8000*(1.010)^25 - 1)/0.010 = $1,025,845.60

However, if the interests compounds more often than once per period this may be be as Aisha stated above.  

http://thismatter.com/money/investments/present-value-future-value-of-annuity.htm

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11/03/12

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