FUTURE VALUE OF AN ORDINARY ANNUITY

ANNUITY

An annuity is a stream of equal payments that occurs through time.  The payments can either be cash inflows or cash outflows.  Both Present Values and Future Values of these payment streams can be calculated.  There are two general types of annuities: an Ordinary Annuity or an Annuity Due.

ORDINARY ANNUITY

An ordinary annuity is an annuity in which the payments occur at the end of each period. The payments can either be cash inflows or cash outflows. Both Present Values and Future Values of these payment streams can be calculated.  Most annuity problems are assumed to be ordinary annuities unless otherwise stated.

ANNUITY DUE

An annuity due is an annuity in which the payments occur at the beginning of each period. The payments can either be cash inflows or cash outflows. Both Present Values and Future Values of these payment streams can be calculated.

FUTURE VALUE OF AN ORDINARY ANNUITY

The future value dollar amount at the end of a stream of equal payments that have been made at the end of each period.

In an ordinary annuity, a stream of equal payments is made through time. Each payment earns compound interest (or a compound return) through time and each payment will have it’s own Future Value.  The sum of all the Future Values of all payments represent the Future Value of the Ordinary Annuity.

The payments can be either cash inflows or cash outflows.  If the payments are inflows, the future value is assumed to be an outflow.  If the payments are outflows, the future value is assumed to be an inflow.

In the calculation of future values of ordinary annuities, Future Value Interest Factors for Annuities (FVIFA) are used to facilitate the calculations.