Calculating the Present Value of an Annuity with Annual Compounding

[TonyC]

I am having trouble with the following problem:
What will be the value of an annuity in today's dollars if $1000 is to be deposited for 18 years into an account paying 4.5% interest compounded annually?

I used the following formula (I'm guessing I've figured something incorrectly)

A= P[(1 + r)^m - 1]/r

P=1000
r=i/n
i=4.5% or .045
n=1
t=18
m=n(t) or 18

1000[1 + .045)^18 - 1/.045

I know this is incorrect because my choices are multiple choice

 

[hotvette]

There are a couple of possibilities. One, your last equation either has a typo or you did it wrong:

1000[1 + .045)^18 - 1/.045 ==> should be \frac{1000[(1 + .045)^{18} - 1]}{.045}

The second is that it's not an annuity problem but rather a simple compound interest problem FV = PV(1+r)^m

 

[TonyC]

Thank you very much.