Assuming
in our example, that the interest rate is 8%, the future value
of the annuity can be calculated as:
| FVA |
= |
RM100
x (1.08)1 + RM100 |
| |
= |
RM208 |
Alternatively,
we can use the future value interest factor of annuity table
(FVIFA) – Table 4 in Appendix, to determine the future
value of the above annuity.
The future
value of an annuity can be calculated using the following
formula:
FVA
= PMT x FVIFA (r%, n)
Where,
| FVA |
= |
future
value of annuity, |
| PMT |
= |
equal
payment, |
| FVIFA
(r%, n) |
= |
future
value interest factor of annuity, for interest rate, r%
and number of periods, n. |
From
the FVIFA table, we must first determine the factor for FVIFA
(r%, n); in our example, r = 8%, and n = 2. Hence, looking
down column (8%), the intersection with row (n = 2) across
is 2.08. Using this factor, we can calculate FVA as:
FVA
= 100 x 2.08 = RM208
It is
important to understand the basic of time value of money,
such as compounding, discounting and annuities, as there are
many applications that make use of this concept in financial
matters. And, some of these applications are those that we
would frequently encounter in our daily lives for example,
in the determining the amount of deposits needed to accumulate
a future sum (retirement savings) – future value of
annuity, or in the calculation of loan amortisation for home
mortgages – present value of annuity. Other examples
include the calculation of future value of our savings in
fixed deposits.
|
