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TVM Formula Index Lump Sum Formulas Regular Annuity Formulas Annuity Due Formulas Notice that we can view the annuity as a series of three $100 lump sums, or we can (and will) treat the cash flows as a package.
Using the example shown in the time line (above), and a 9% per period interest rate, we get: FVA = 100*(1.09)2 + 100*(1.09) + 100 = 327.81 Note that the future value of a regular annuity is, by definition, in the same period as the last cash flow. So, the first cash flow must be taken two periods forward, the second cash flow must be moved one period ahead, and the last cash flow is already there so it doesn't move at all. Therefore, if the interest rate is 9%, then the future value of this annuity is $327.81 at the end of period 3. The formula shown above works fine, but it is tedious if the annuity has more than a few payments. Fortunately, we can derive a closed-form version of that equation, which means that we don't have to iterate through a series of sums. The closed-form equation is:
where Pmt is the per period annuity payment amount ($100 in our example). This formula is much easier to use, no matter how many payments there are. In this case, it gives us:
which is exactly the same as we got previously. Let's look at another example.
www.tvmcalcs.com/tvm/regular_annuity_fv
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Whew! Can you imagine solving this problem using the open-form version of the equation? In any case, we just found that investing $500 per month at 8% per year will result in a nestegg of $1,146,941 after 35 years. Not too bad, especially when you consider that $500 per month is pretty much equal to a car payment. (Note: if you solve the above equation and get $1,148,067.778, that is due to rounding the interest rate. Instead of using 0.00667, as shown, you should calculate it as 0.08/12 and use that result.) Please continue on to the next page to learn how to calculate the present value of a regular annuity. Previous: Lumpsums Other
www.tvmcalcs.com/tvm/regular_annuity_fv
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