Future Value of Cash Flows Explained

Question:

The future value of a series of equal-sized cash flows with the first payment taking place at the end of the first period is a:

A) Future value of a single amount.

B) Future value of an ordinary annuity.

C) Present value of an ordinary annuity.

D) Future value of an annuity due.

Answer Description:

The future value of a series of equal-sized cash flows, where the first payment occurs at the end of the first period, is known as the Future Value of an Ordinary Annuity.

Here’s why:

Future Value of an Ordinary Annuity: In this scenario, payments are made at the end of each period. This is contrasted with an annuity due, where payments are made at the beginning of each period. Therefore, the correct term for a series of equal cash flows with payments starting at the end of the first period is the future value of an ordinary annuity.