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
Group retained profits Retained profits ideally should be the amounts that can be distributed as dividends. Therefore,  in arriving at group retained profits, careful attention s

Cashflows from operating activities  operating activities are the principle revenue generating activities of the business and examples of such cashflows include: Cash re

Q. What is Capital Gain? Capital Gain - Portion of total GAIN recognized on the sale or exchange of a no inventoryasset that isn't taxed as ORDINARY INCOME. Capital gains have

AsIDENTIFY THE MAIN PROVISIONS OF THE PARTNERSHIP ACT k question #Minimum 100 words accepted#

You will gain welfare from consuming bread and chocolate. Your welfare is described numerically by W = 4B + 2C, where B denotes the quantity of bread you choose to consume, and C d

what are methods of calculating depreciation?

John Chan considers buying a six-month stock futures contract on the shares of Li & Fung Limited. Shares of Li & Fung Limited are now trading at $50 per share and it is expected th

Unqualified Opinion - AUDIT opinion not qualified for any material scope restrictions nor departures from GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). AUDITOR may issue an unqu

like Amazon.com face with respect to safeguarding its assets? What types of controls do you think it already has in place to minimize these risks?

Wendy is evaluating a capital budgeting project that should last for 4 years. The project requires $ 800,000 of equipment. She is unsure what depreciation method to use in her anal