Future Value of Annuity Calculation Explained

When calculating the future value of an ordinary annuity with a 7 percent interest rate over a period of 20 years, the correct annuity compounding factor for use in the FVAN (Future Value of Annuity) equation would be option B: [(1.07)^20 - 1]/0.07. This equation takes into account both the compound interest (represented by the (1.07)^20) and the annual rate (represented by the 0.07) over the specified period.

The use of this annuity compounding factor is specific to the calculation of ordinary annuities. An ordinary annuity is a series of equal payments made at the end of each period over a fixed amount of time. The formula provides a way to find out the total sum that will be accumulated after the given period if a certain sum of money is invested each year at a specified interest rate.