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6 November, 21:11

You own a contract that promises an annuity cash flow of $300 end-of-the-year cash flows for each of the next 5 years. (Note: The first cash flow is exactly 1 year from today). At an interest rate of 8%, what is the future value of this contract exactly 5 years from today?

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  1. 6 November, 22:49
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    Answer:$1759.9803

    Explanation: Annuities are equally sized cash flows that are paid out/received at equal periods over time. They can either be inflows or outflows. There are 2 types of annuities:

    Annuity due - Cash flows that occur at the beginning of each period.

    Ordinary Annuity - Cash flows that occur at the end of each period.

    For this question an ordinary annuity applies. Using time value of money, the principles in question are:

    Payment per period (PMT) : The amount paid into/out (inflow or outflow) of a financial stream.

    Number of years (n) : The total amount of years it takes for an investment to mature.

    Interest rate (i) : An annual percentage of the oustanding investement, charged as interest.

    By inputing values on a financial calculator (Calculator used: HP 10bII+) the following can be deduced:

    PMT = $300

    n = 5 years

    i = 8

    Answer: FV = $1759.9803.
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