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The Future Value of Annuity (FVA)

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Understanding the Future Value of Annuity (FVA) is crucial in corporate finance for calculating the value of equal payments at a future date with compound interest. It's used for financial planning, retirement investments, and loan repayments. The FVA formula, tables, and concepts of ordinary and growing annuities are key for strategic business decisions and long-term financial management.

Understanding the Future Value of Annuity in Corporate Finance

The Future Value of Annuity (FVA) is a critical concept in corporate finance that calculates the value of a series of equal payments at a future date, factoring in compound interest. This concept is essential for financial planning, retirement investments, loan repayments, and strategic business decisions. It allows companies to project future cash flows, determine the future value of retirement savings, and calculate the total amount to be repaid on annuity-based loans. For example, a company making annual investments of £5000 at a 5% interest rate for ten years can use the FVA formula to forecast the accumulated amount, which is instrumental in strategic financial planning.
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The Formula for Calculating Future Value of Annuity

The FVA is calculated using a formula that includes the periodic payment (P), the interest rate per period (r), and the number of periods (n). The formula is FVA = P * [(1 + r)^n - 1]/r. This formula accounts for compound interest, which is the interest earned on both the initial principal and the accumulated interest from previous periods. By applying this formula, businesses and individuals can predict the growth of their investments over time, which is crucial for effective financial management and long-term planning.

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00

In ______ finance, the Future Value of Annuity (FVA) is used to estimate the worth of equal ______ at a later date, including ______ interest.

corporate

payments

compound

01

FVA Compound Interest Component

Interest earned on both initial principal and accumulated interest from previous periods.

02

FVA Formula Variables: P, r, n

P = Periodic payment, r = Interest rate per period, n = Number of periods.

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