Question

Time value of money calculations can be solved using a mathematical equation, a financial calculator, or a spreadsheet. Which of the following equations can be used to solve for the future value of an ordinary annuity?
a. PMT/r
b. PMT x {[(1 + r)^n - 1]/r} x (1 + r)
c. PMT x {1 - [1/(1 + r)^n]}/r
d. PMT x {[(1 + r)^n - 1]/r)

Answer 1

Answer:

d. PMT x {[(1 + r)^n - 1]/r)

Explanation:

Annuity is a payment of fix amount for specified period of time. It Future value can be calculated by using compounding effect formula only.

PMT/r is a formula for perpetuity it is not for annuity because it does not involve any time period.

PMT x {[(1 + r)^n - 1]/r} x (1 + r). this is a wrong formula as it does not have any function of present value or future value, it is mixed formula, which made incorrectly.

PMT x {1 - [1/(1 + r)^n]}/r this formula is for present value of annuity not for future value of annuity.

PMT x {[(1 + r)^n - 1]/r) is a future value of annuity formula because it involves the compounding effect.