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Time Value of Money, Part-4

Posted by Prashant Shah on August 28, 2010

If Mr. A invests Rs.1000 per annum for next 10 years in a mutual fund which is earning 10% per annum. What amount of money will he receive after 10 years?

This is the question of annuity. Annuity means a series of cash flows at equal interval. Payments of EMI, receipt of salary are a few of the examples of annuity.

Annuity is of two types:

Annuity Due:  Where cash flow happens at the beginning of the period

Annuity End:  Where the cash flow happens at the end of the period

Let’s solve the above question considering Annuity End

We don’t get into formulae of the annuity and we will use a financial calculator

PMT = -1000

N = 10

i/y = 10

FV = ?

Answer: 15,937

Calculation for Annuity Due:

PMT = -1000 (begin mode)

N = 10

i/y = 10

FV = ?

Answer = 17,531

Alternatively you can multiply the annuity end answer with rate of interest to get the answer.

E.g.  15,937 × 1.1 = 17,531.

Annuity can also be in monthly/quarterly or semi-annual intervals. In that case we will alter N and i/y as we did in the Part-3 of the time value of money learning.

Mr. A has Rs.10,000 today and want to invest further Rs.1000 per year from today for next 10 years in a mutual fund earning 10% return. After 10 years he will get..

PV = -10000

PMT = -1000(begin mode)

N = 10

i/y = 10

FV = ?

Answer: 43,469.

Important: Here initial value and annuity both are taken negative because both are outflows.


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