Future Value with Even Cash Flows- Annuity Due

Future Value with Even Cash Flows- Annuity Due

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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 cash flows due occur at the beginning of the each period.

Time Line

Question

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 beginning of each month.)

Solution

FVAD =C*{ [ (1+r)^t -1 ]/r}*(1+r)

C=$500

r=10%=0.10 ( per month)

t=2.5 * 12 = 30 months

 

FVAD =500*{ [ (1+0.10)³⁰ -1 ]/0.10}(1+0.10)

=500*164.49*1.10=$90,469.5

This means that in the next 2.5 years Mr. Sok will have $90,469.5