Business Finance Chapter 4 Notes

2/17/25 BUSA 3150 – Business Finance Walton


Chapter 4
Learning Objective 2
4.2 Future Value of an Annuity Stream:

 Annuity: A series of equal cash flows at regular intervals across time.
o Payment amounts are the same, over equally spaced intervals
o Example: putting away $1,000 at the end of every year for the
next five years
o Equation:
4 3 2 1 0
F V =CF 1 ×(1+r ) +CF 2 ×(1+r ) +CF3 ×(1+ r) +CF 4 ×(1+r ) +CF 5 ×(1+ r)

CF is the same annual cash flow, r is the interest
rate, with five payments
 Another way to write the equation:
F V =CF × [ ( 1+r )4 + ( 1+ r )3+ ( 1+ r )2+ ( 1+ r )1+ ( 1+ r )0 ]

( 1+r )5−1
 A further condensed formula is: FV =CF ×
r

 Future value interest factor of an annuity (FVIFA): The
mathematical factor used to multiply the annuity to calculate the
future value of the annuity stream.

( 1+r )n−1
FVIFA=
r
o Set of payments (n)
o Interest rates (r)



 Ordinary Annuity: A series of equal and regular payments in which
the payments occur at the end of each period
o Common ordinary annuity payments include:
 mortgage payments
 car loan payments
 corporate bond coupon payments