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Future Value with Even Cash Flows- Ordinary Annuity

Future Value with Even Cash Flows- Ordinary Annuity

Future value with even cash flows will be received from the same cash flows which are deposited or invested with appropriate discount rate during more than one period.

The ordinary cash flows occur at the end of each period.

Time Line

Question 1

To illustrate the two different ways of calculating future values, consider the future value of $2,000 invested at the end of each of the next five years. The current balance is zero, and the rate is 10 percent.

Solution

Time line for $2,000 per year for five years, but current balance is zero.

First Method

Future Value Calculated by Compounding Forward One Period at a Time

Second Method 

Future Value Calculated by Compounding Each Cash Flow Separately

Third Method 

Third way is used formula

Question 2

Mr. Sok has salary of $1,000, he always remain $500 every month. Now he wants to take this money of $500 to lend his friend to earn interest rate 10% per months. How much money will Mr. Sok has in the next 2.5 years?  ( assume Mr. Sok deposited at the end of each month.)

Solution

C=$500

t=2.5 x 12 =30

r=10%=0.10( per month)

FVA=C*{ [(1+r)t -1]/r }=500*{ [ (1+0.10)30 -1]/0.10}

 FVA=500*164.49=$82,245

This means that in the next 2.5 years Mr. Sok will have $82,245

Source:

  1. Phnom Penh HR
  2. Mcgraw-Hill – Fundamentals Of Corporate Finance

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