Question

On January 1, 2020, ABC Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $60,000 at 9% each January 1 beginning in 2020. What will be the balance in the fund, on January 1, 2025 (one year after the last deposit)?

Answer 1

Answer:

$391,400

Explanation:

we can use the future value formula for an annuity due:

future value of an annuity due = (1 + r) x payment x {[(1 + r)ⁿ - 1] / r}

• payment = $60,000
• r = 9%
• n = 5

FV = (1 + 9%) x $60,000 x {[(1 + 9%)⁵ - 1] / 9%} = 1.09 x $60,000 x {[1.09⁵ - 1] / 9%} = $65,400 x 5.9847 = $391,400

In an annuity due, the first payment is done immediately and not at the end of the period like a normal annuity.