hi, can you explain me why we use Pv annuity in this problembut we have Fv which
ID: 2662587 • Letter: H
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hi, can you explain me why we use Pv annuity in this problembut we have Fv which is $30,000 insavin accounts eight years formnow that will be future value. how we can put as Pv inthisquestion. if i am wrong can you explain me when we use Pv andwhen we use Fv. hi, can you explain me why we use Pv annuity in this problembut we have Fv which is $30,000 insavin accounts eight years formnow that will be future value. how we can put as Pv inthisquestion. if i am wrong can you explain me when we use Pv andwhen we use Fv.Explanation / Answer
We know that Annuity is fixed number of payments or receipts atthe end of each year for some fixed number of periods.
According to the given problem,
Future value of annuity = $30,000
{since we are depositing fixed amount each year to get thefuture value.}
No. of years = 8yrs
Interest rate = 5.25%
Payment for each year(PMT) =?
To find out the payment,
FVa= PMT [((1+i)n – 1)/i]
$30,000 = PMT [ ((1+0.0525)8– 1)/ 0.0525]
$30,000 = PMT [ (1.506 – 1) / 0.0525]
PMT = $30,000 / 9.64 = $3112
So, the required payment at the end of each year is $3112.
Conlusion: In the given problem, there is no question offinding Present value of annuity. The distinction between PV ofannuity and FV of annuity is FV of annuity answers the question“What will the payments be worth then?” while the PV ofannuity answers the question “What are the payments worth now(or some time prior to then)?”.
Present value of annuity is used to find out the present worthof payments made each year.
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