Thread Subject: Value of Annuity

Hi
I am in need of help please! i am finding out whether it
is worthwhile accepting a lump sum of $450,000 or taking
$15,000 per year for 15 years with interest of 5%

I have worked out the answer using other software but need
to be able to write it on Matlab!
My formula is

FV=C[((1+i)^n)-1/i]

i=interest
n=number of years

I have created the correct M-file but how can i define my
number of years?
I can work each year out individually by saying n=1, n=2
etc but can i use n=1:1:20 and make my M-file understand i
need to sum all these values together?

I can't get my head around it so cheers for any help!

"Dave Green" <slap_the_dingles@hotmail.com> wrote in
message <fsbllu$fq8$1@fred.mathworks.com>...
> Hi
> I am in need of help please! i am finding out whether it
> is worthwhile accepting a lump sum of $450,000 or taking
> $15,000 per year for 15 years with interest of 5%


Regardless of math, in real life I will always go for the
lump sum :)
You never know what happens in 15 years.

In article <fsbllu$fq8$1@fred.mathworks.com>,
Dave Green <slap_the_dingles@hotmail.com> wrote:

>I am in need of help please! i am finding out whether it
>is worthwhile accepting a lump sum of $450,000 or taking
>$15,000 per year for 15 years with interest of 5%

>I have worked out the answer using other software but need
>to be able to write it on Matlab!
>My formula is

>FV=C[((1+i)^n)-1/i]

>i=interest
>n=number of years

I suspect FV stands for Future Value, and C stands for original Capital.
However, there is nothing in that formula that corresponds to the
annuity payment.

It is obvious that the formula is wrong: let i (interest) be 0.
Then C*((1+0)^n - 1/0) = C*(1 - 1/0) = C*(-infinity). Thus according
to that formula, if the interest is 0, then the Future Value is
negative infinity after any time (including after 0 time since 1^0 is 1.)

With the formula given, with n=15 years, the FV will be negative if
the interest is less than slightly over 14% -- and that's not taking
into account the annual payments. Obviously the formula is wrong:
with no payouts and 14% interest for 15 years, the capital would have
grown by a factor of over 7.
--
  "When a scientist is ahead of his times, it is often through
   misunderstanding of current, rather than intuition of future truth.
   In science there is never any error so gross that it won't one day,
   from some perspective, appear prophetic." -- Jean Rostand

On Tue, 25 Mar 2008 20:01:02 +0000 (UTC), "Dave Green"
<slap_the_dingles@hotmail.com> wrote:

>Hi
>I am in need of help please! i am finding out whether it
>is worthwhile accepting a lump sum of $450,000 or taking
>$15,000 per year for 15 years with interest of 5%
>
>I have worked out the answer using other software but need
>to be able to write it on Matlab!
>My formula is
>
>FV=C[((1+i)^n)-1/i]
>
>i=interest
>n=number of years
>
>I have created the correct M-file but how can i define my
>number of years?
>I can work each year out individually by saying n=1, n=2
>etc but can i use n=1:1:20 and make my M-file understand i
>need to sum all these values together?
>
>I can't get my head around it so cheers for any help!

As Walter pointed out, the formula is incorrect. You are missing a set
of parentheses. Once you get the formula straightened out, note that n
is just a number, not a vector, that's plugged into the equation,
which give a single result.

http://en.wikipedia.org/wiki/Future_value

And if you are comparing two payments, they both have to be present
values or both future values.
--
John