The University of Cambodia

Course: Foundations of Financial Management (FIN201)

Lecturer: Yem SamOrn
Session: Evening
Name: Vong Bopha
ID: 60-170603
Homework
Chapter 9: Time Value of Money

27. As stated in the chapter, annuity payments are assumed to come at the end of each payment
period (termed an ordinary annuity). However, an exception occurs when the annuity
payments come at the beginning of each period (termed an annuity due). To find the present
value of an annuity due, subtract 1 from n and add 1 to the tabular value. To find the future
value of an annuity, add 1 to n and subtract 1 from the tabular value. For example, to find the
future value of a $100 payment at the beginning of each period for five periods at 10 percent,
go to Appendix C for n = 6 and i = 10 percent. Look up the value of 7.716 and subtract 1 from
it for an answer of 6.716 or $671.60 ($100 × 6.716).
What is the future value of a 10-year annuity of $2,000 per period where payments
come at the beginning of each period? The interest rate is 8 percent.

Solution: Find the future value:

Appendix C (n + 1 and FVIFA – 1)

Formula: FVA = A x FVIFA

By: A = $2,000
n = 10 + 1 = 11
i = 8% = 0.08
(1+i)n−1
FIVA = [ i ] −1

(1+0.08)11−1
= [0.08
−1 ]
= 15.645
 FVA = $ 2,000 x 15.645 = $ 31,290
 So: The future value is FVA = $ 31,290
28. Related to the discussion in problem 27, what is the present value of a 10-year annuity of
$3,000 per period in which payments come at the beginning of each period? The interest rate is
12 percent.

Solution: Find the present value:

Appendix C (n – 1 and FVIFA + 1)

Formula: PVA = A x FVIFA

By: A = $3,000
n = 10 – 1 = 9
i = 12% = 0.12
1
FIVA =
[1−
]
(1+ i)n
i
+1

1
=
[
= 6.328
1−
(1+ 0.12)9
0.12 ]
+1

 PVA = $ 3,000 x 6.328 = $ 18,984.75

So: The present value is PVA = $ 18,984.75