PRESENT VALUE OF AN ANNUITY DUE
The
present value dollar amount today at the beginning of a stream of equal payments
that will be made at the beginning of each future period.
In
an annuity due, a stream of equal payments is made through time at the beginning
of each period. Each separate payment is discounted to the present and all
present values of future payments are added up to arrive at the present value of
the annuity stream.
The
payments can be either cash inflows or cash outflows.
If the payments over time are inflows, the present value is assumed to be
an outflow. If the payments over
time are outflows, the present value is assumed to be an inflow.
In
the calculation of the present value of an annuity due problem, Present 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 PVIFA values.
The PVIFA factor for an annuity due is just equal to the PVIFA 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.