FUTURE VALUE OF AN ANNUITY DUE
The
future value of an annuity due is the dollar amount at the end of a stream of equal payments that have
been made at the beginning of each period.
In
an annuity due, a stream of equal payments is made through time. Each payment
earns compound interest (or a compound return) through time and each payment
will have it’s own Future Value. The
sum of all the Future Values of all payments represent the Future Value of the
Annuity Due.
The
payments can be either cash inflows or cash outflows.
If the payments are inflows, the future value is assumed to be an
outflow. If the payments are
outflows, the future value is assumed to be an inflow.
In
the calculation of the future values of annuity due problems, Future Value
Interest Factors for Annuities Due are used to facilitate the calculations.
Rather than use a separate notation and maintain a separate set of
annuity interest rate tables, the interest rate factors for Annuity Due problems
are easily computed from the ordinary FVIFA values.
The FVIFA factor for an annuity due is just equal to the FVIFA factor for
an ordinary annuity with a specific interest rate (i)
and number of periods (n) multiplied
by (1+i).
Be sure to see the text book assignments for more information on this topic.