Hi all, I am starting go through the CFAI questions and hit a hard rock.
Can anybody please explain to me how to use FVAADV in the below answer. Looked it up on the CFAI book, still don’t seem to grasp what they are using.
Thank you so much for your help.
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Educational funding for Anna:
The fund will accumulate in two stages to a terminal value of $1.3 million in 15 years:
Four years of funding, starting immediately
Eleven years of growth of the accumulated savings (at 3% annually)
To meet the terminal amount in the growth stage, the value at the end of the four-year funding period must be: X x FV(11 years, 3%)= $1,300,000X = $939,148
To accumulate $939,148 at the end of four years of funding, payments (PMT) starting immediately must be: PMT x FVAADV(4 years, 3 %)= $939,148PMT = $217,943
Alternatively: $217,943 × FVAADV(4 years, 3%) × FV(11 years, 3%) = $1.3 million
What they call FVAADV is the accumulated value of an annuity due. In this case, 217,943 x FVAADV will be the 939,148. This will be the value of the account at time 4. It will roll up with another 11 years’ interest to 1.3 million.
You could also just discount the 1.3 million back with 15 years’ interest and equate it to the PV of a 4 year annuity due @ 3%. This will still produce 217,943.
Don’t get confused because of the notation. This is simply time value calculations that you did in L1. You just have to make sure you’re in the right mode, BGN or END.
