Ordinary Annuity vs. Annuity Due
Study of the relationship between time and money The amount a sum of money will grow to in the future assuming compound interest; Can be compute by . Future Value of Ordinary Annuity (Table ); Present Value of Ordinary Annuity. an ordinary annuity or an annuity in arrears). • The present value of an annuity is the sum of the present values of each payment. Example Calculate the present value of an annuity-immediate of Solution: Table summarizes the present values of the payments as .. values of annuities assuming compound interest. Basis for Comparison, Ordinary Annuity, Annuity Due or outflow of cash fall due for payment at the end of each period.
The first cash flow of the annuity falls due at the present time. The most common example of an annuity due is the rent, as the payment should be made at the start of the new month.
As in the case of an ordinary annuity, the present and future values of the annuity due are also calculated as first and last cash flows respectively. Ordinary annuity refers to the sequence of steady cash flow, whose payment is to be made or received at the end of each period.
Difference Between Ordinary Annuity and Annuity Due
Annuity due implies the stream of payments or receipts which fall due at the beginning of each period. Each cash inflow or outflow of an ordinary annuity is related to the period preceding its date. On the contrary, an annuity due, represent the cash flow period following its date.
As the cash flows belonging to annuity due occur one period earlier than that of an ordinary annuity. An ordinary annuity is best when an individual is making payment whereas annuity due is appropriate when a person is collecting payment. As the payment made on annuity due, have a higher present value than the regular annuity.
Annuity vs Perpetuity | Top 5 Best Differences (with Infographics)
This is because of the principle of time value of money, i. One Extra Period As we seen that ordinary annuity payments are made at the end of each period whereas the payments for annuity due are made at the beginning of each period.
Hence, the difference between ordinary annuity and annuity due is one extra period. Thus, an adjustment needs to be made for this one extra period while calculating both the present value and future value of an annuity due.
- Ordinary Annuity vs. Annuity Due
- Annuity vs Perpetuity
Future Value of an Annuity Due: However, this is the value if the payments were made at the end of each period. To convert them into annuity due we need to account for the one extra period. First, you calculate the future value as a regular annuity Secondly, you compound the future value, so derived, for an additional period Present Value of an Annuity Due: Calculating the present value of annuity due is a simple 2 step procedure: First, you calculate the present value as a regular annuity Secondly, you discount the present value for an additional period Please note the difference.
While calculating future values, we compounded the result for an extra period i. On the other hand, while computing present values, we discounted for one extra period i.
The concept of annuity due will be hidden in the question i.