does anyone have any tips or ideas on how to determine if you use the future value annuity formula or the present value formula and if it's present, which one of the two? i always get confused and caught using the wrong one.. thanks guys
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Determining which annuity formula to use (1 Viewer)
- Thread starter toby12
- Start date
For Future Value Formula:
Look for words like "how much will the investment be worth after 20 years"
For Present Value Formula:
Look for words like "what amount does s/he have to invest now so that ..."
The present value formula that you use will depend on the information given. Remember that present value situations are instead of what's actually happening in the question.
For example you might be saving $20 a week for a new handbag in an investment account. You'll get interest and eventually get to the target amount. Instead of this you could just put in a big lump sum now, a little bit less than the target amount, and let the interest make up the difference. This large lump sum is the "present value".
You'll use the big formula if you know how much you're investing per week at the moment and need to find the big lump sum you could invest.
You'll use the little formula if you actually know the target amount and need to fid the big lump sum you could invest. (It's just the compound interest formula working backwards.)
AND DON'T FORGET LOANS
If you have a question about Loans, you ALWAYS use the big PV formula and N is always the amount borrowed, M is the amount of each repayment.