Page 616 - Accounting Principles (A Business Perspective)

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Exhibit 123: Future value of an annuity

Exhibit 124: Compound interest and present value

As another example, suppose that you wish to have USD 4,000 in three years to pay for a vacation in Europe. If
your investment increases at a 20 per cent rate compounded quarterly, how much should you invest now? To find
the amount, you would use the present value factor found in Table A.3, 12 period row, 5 per cent column. This
factor is 0.55684, which means that an investment of about 55 cents today would grow to USD 1 in 12 periods at 5
per cent per period. To have USD 4,000 at the end of three years, you must invest 4,000 times this factor
(0.55684), or USD 2,227.36.
The semiannual interest payments on a bond are a common example of an annuity. As an example of calculating

the present value of an annuity, assume that USD 100 is received at the end of each of the next three semiannual
periods. The interest rate is 6 per cent per semiannual period. By using Table A.3 (Appendix), you can find the
present value of each of the three USD 100 payments as follows:
Present value of $100 due in:
1 period: 094340 x $100 = $94.34
2 period: 0.89000 x 100 = 89.00
3 period: 0.83962 x 100 = 83.96
Total present value $267.30

Accounting Principles: A Business Perspective 617 A Global Text