Basic Annuity Calculation

In this section, we will discuss the most basic annuity calculation. This annuity calculation finds how much the annuity owner would have accumulated in annuities after so many years. This basic annuity calculation is very useful. We use the annuity formula below to do the annuity calculation. Once you understand how to do this annuity calculation, you can memorize the annuity formula below so that you can do the annuity calculation quickly in the future.

How to calculate the amount of annuity?

Suppose you invest an amount of money A in an annuity at the end of each of the next n years. From this annuity, you earn a rate of interest r throughout the period. The question is how much will you have accumulated at the end of nth year?

The annuity chart above illustrates how an annuity works. The annuity owner deposits money A into the annuity every year from year 0 to year n. We have an easy way of calculating how much the owner would accumulate. The annuity calculation assumes that:

• the first payment is made at the end of the first time period (year 0)
• the last payment is made at the end of the last time period (year n)
• the amount A is constant each year
• the amount of annuity accumulated, An, is the sum all the annuity contributions grown at the rate of interest r.

The annuity calculation

First use the formula for compound interest:

<< Previous    [1]  2    Next >>