analytics-for-managerial-decision-making

26973 while annual compounding returns only 125440 42

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Unformatted text preview: d -- for the given example, monthly compounding returns 1.26973, while annual compounding returns only 1.25440! 4.2 Future Value of Annuities Annuities are level streams of payments. Each payment is the same amount, and occurs at a regular interval. Sometimes, one may be curious to learn how much a recurring stream of payments will grow to after a number of periods. e Graduate Programme for Engineers and Geoscientists I joined MITAS because I wanted real responsibili Please click the advert Maersk.com/Mitas Real work Internationa al International opportunities ree wor o ree work placements Month 16 was I was a construction supervisor in the North Sea advising and helping foremen he solve problems s Download free ebooks at bookboon.com 23 Compound Interest and Present Value Analytics for Managerial Decision Making 4.3 Future Value of an Annuity Due An annuity due (also known as an annuity in advance) involves a level stream of payments, with the payments being made at the beginning of each time period. For instance, perhaps you plan on saving for retirement by investing $5,000 at the beginning of each year for the next 5 years. If the annual interest rate is 10% per year, how much will you accumulate by the end of the 5-year period? The following graphic shows how each of the five individual payments would grow, and the accumulated total would reach $33,578: Although the graphic provides a useful explanatory tool, it is a bit cumbersome to implement. The same conclusion can be reached by reference to a FUTURE VALUE OF AN ANNUITY DUE TABLE. Examine the table linked at the website to find the value of 6.71561 (10% column/5-period row). Multiplying the $5,000 annual payment by this factor yields $33,578 ($5,000 X 6.71561). This means that the $25,000 paid in will have grown to $33,578; perhaps Albert Einstein was right! 4.4 Future Value of an Ordinary Annuity Sometimes an annuity will be based on “end of period” payments. These annuities are called ordinary annuities (also known as annuities in arrears). The next graphic portrays a 5-year, 10%, ordina...
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