Question

Assume that the future value of an ordinary annuity is $3,246, the annual payment is $1,000, and the interest rate is 8 percent. How many years will it take the $1,000 annual payments to grow to $3,246?
a. 1 year
b. 3 years
c. 5 years
d. 7 years

Answer 1

Answer: b. 3 years

Explanation:

Based on the future value of $3,246 and the annual payment of $1,000, one can guess that the number of payments (years) till the future value is reached will be 3 years.

Plug 3 years in to find out if you are right;

= Annuity * (( (1 + r)^n - 1) / r)

= 1,000 * (( ( 1 + 8%)³ - 1) / 8%)

= $3,246

Answer is proven to be 3 years.