Example of annuity, Financial Accounting

Assume Mr. Ram deposits Rs. 10,000 annually in a bank for 5 years, at 10 percent compound interest rate. Compute the value of this series of deposits on the end of five years by assuming that (i) all deposit occurs on the end of the year (ii) all deposit occurs at the starting of the year.

Solution:

The future value of regular annuity will be as:

Rs. 1000 (1.10)4 + 1000 (1.10)3 +1000 (1.10)2+1000 (1.10) +1000

= 6105.

The future value of an annuity due will be as:

Rs. 1000 (1.10)5 + 1000 (1.10)4 +1000 (1.10)3+1000 (1.10)2 +1000 (1.10)

= Rs 1000 (1.611) + 1000 (1.4641) + 1000 (1.331) + 1000 (1.21)+1000 (1.10)

= Rs. 6716.

In the above illustration you have seen the dissimilarity in future value of a regular annuity and annuity due. This diversity in value is because of the timing of cash flow. Within the case of regular annuity, the last cash flow doesn't earn any interest, for individual period the cash flows earns an interest and in case when annuity due.

Posted Date: 4/9/2013 2:32:58 AM | Location : United States







Related Discussions:- Example of annuity, Assignment Help, Ask Question on Example of annuity, Get Answer, Expert's Help, Example of annuity Discussions

Write discussion on Example of annuity
Your posts are moderated
Related Questions
following are the amounts of the assets and liabilities of St. Kitts Travel Agency at December 31, 2010, the end of the current year, and its revenue and expenses for the year. The

Illustration: Computation of retained profits acquisition Normal 0 false false false EN-US X-NONE X-NONE MicrosoftIn

The current stock price of IOU is $250 and has a standard deviation of 35% per year. The risk-free interest rate is 5% per year compounded continuously. Find the prices of a call a

Absorption costing is a cost accounting method that tries to charge all direct costs and all production costs of an organization to specific units of pr

Show all support work for your calculations. 1.  Simple Interest versus Compound Interest [LO1]  First City Bank pays 7 percent simple interest on its savings account balances,

Creation An express trust is "created not by facts and circumstances, but by the express words of the settlor". (Fitzgerald v Stewart) It may be created in the following ways:

Comparison with Sector Averages Any conclusion relating to the signs of overtrading needs to be put in the context of the normal values of accounting ratios indicated by the se

A. Material Sampling -Analyzing Direct Material Costs You are reviewing a cost proposal, which includes an $800,200 direct material estimate. After Initial examination of the pr

Q. Principles of banking and finance? An introduction to the principles of banking and finance. It covers a broad variety of topics using an economic perspective and aims to gi

you are aceo of acme ,inc located in united states .you use the discounted pay back period method and accept all projects that pay back in hree years.a project that will cost 5,500