When you are given a future value or present value annuity how do you calculate interest earned?

Question

When you are given a future value or present value annuity how do you calculate interest earned?

Answer 1

To calculate the Internal Rate of Return using arithmetic is very complex.

You basically equate NPV to 0 and solve for the rate.  There are many calculators and Microsoft excel can solve the equation for you.  In most academic courses the use of calculators to solve IRR is acceptable. however if your course requires you to solve the equation then you must seek some assistance to help you with the algebra

Answer 2

The relationship is defined as

PV = FV/(1+i)^n

where PV is present value FV is future value i = interest rate and n is the number of compounding periods

as long as you know either PV or FV and the interest rate and compounding periods you can determine the interest earned

If you had $549.63 and earned interest of 6% compounded monthly for 10 years you would calculate the FV as

$549.63 x [1+0.06/12]^120 = $1,000.00

The interest earned in 10 years is the difference between FV and PV or $450.37