Future
Annuity Example
Present value of Future annuity may be calculated by
the following formula
C x (Annuity Factor) x Discount Factor
Future
Annuity Example
Mr. Sheraz Khan contacted an insurance company for
annuity. He was offered an annuity amount of $ 25,000 for 3 years. Discount
rate for annuity is 8%. Calculate the
present value of the annuity, where annuity start in 4 years
Solution
In first place annuity present value is calculated at
year 4, and then it is further discounted at zero year. it means the future
annuity calculation, we need to perform discounting twice.
1. Calculate the annuity at year 4
= 1-(1.08)-3
.08
=2.577
=
$ 25,000 x 2.577
=64,427
2. Discount the present value at year zero
$
64,427 x (1+.08)-4
=$64,427
x .7350
=47,353
Tip
of future annuity
Two
present value are calculated
1.
Present
value is calculated at future year by annuity factor (Single Value)
2.
Present
value is calculated by discounting the value calculates by annuity factor.
