a) Assume you receive an 8 year annuity with annual payments to you of $600 at t

Question

a) Assume you receive an 8 year annuity with annual payments to you of $600 at the end of each year, with the first payment being received at the end of year 1 and the last payment being received at the end of year 8. You invest each payment in an account that pays 6% compounded annually. When the annuity payments stop at the end of year 8, how much will you have in the account at the end of year 8 (rounded to the nearest dollar)?

b) If you do not withdraw any money from the account at the time, and retain that total amount in the account for an additional 10 years, and the account will continue to earn 6% (thus 6% for the entire 18 year period). Please calculate the value in you account at the end of year 18 (rounded to the nearest dollar).

Explanation / Answer

a)

I will use the financial calculator to solve this question:

Here present value (PV) = $0

Interest rate (1/Y) = 6%

year (N) =8

Annual payments (PMT) = $600

After entering these values press CPT

Then press FV, you will get future value at the end of 8 years = $5,938.48

b) value at the end of 18 years or after 10 additional years = $5,938.48*(1.06)^10= $10,634.91

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