B- In order to fund his son’s higher education, Abdullah decided to invest $1000 quarterly for 6 years in an ordinary annuity at 12%

Accounting Jan 25, 2021

B- In order to fund his son’s higher education, Abdullah decided to invest $1000 quarterly for 6 years in an ordinary annuity at 12%. What is the total cash value of the annuity at end of year 6?

Expert Solution

Annuity Amount = $1,000

Interest rate = 12% annually

quarterly interest rate, i = 12/4 = 3% = 3/100 = 0.03

time period = 6 years

number of annuity, n = 6 x 4 = 24

Future value of annuity (total cash value)

= Annuity x [(1 + i)ⁿ - 1] / i

= 1,000 x [(1 + 0.03)²⁴ - 1] / 0.03

= 1,000 x [(1.03)²⁴ - 1] / 0.03

= 1,000 x (2.03279411 - 1) / 0.03

= 1000 x 1.03279411 / 0.03

= 1,000 x 34.4264703

= 34,426.4703 approx

or $34,426 (rounded off)

Total cash value of the annuity at end of 6 years = $34,426

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