What is the Future Value of an Annuity Due Table?An annuity is a series of payments that occur at the same intervals and in the same amounts. An example of an annuity is a series of payments from the buyer of an asset to the seller, where the buyer promises to make a series of regular payments. Thus, Hobo Clothiers buys a warehouse from Marlowe Realty for $2,000,000, and promises to pay for the warehouse with five payments of $400,000, to be paid at intervals of one payment per year; this is an annuity. If the payments are due at the end of a period, the annuity is called an ordinary annuity. If the payments are due at the beginning of a period, the annuity is called an annuity due. Show
You might want to calculate the future value of an annuity, to see how much a series of investments will be worth as of a future date. This can be done by using an interest rate to add interest income to the amount of the annuity. The interest rate can be based on the current amount you are obtaining through other investments, the corporate cost of capital, or some other measure. Ideally, it should be a rate that you can currently obtain or expect to obtain on the open market. An annuity table represents a method for determining the future value of an annuity. The annuity table contains a factor specific to the future value of a series of payments, when a certain interest earnings rate is assumed. When this factor is multiplied by one of the payments, you arrive at the future value of the stream of payments. For example, if there is an expectation to make 8 payments of $10,000 each into an investment fund at the beginning of each period (an annuity due) and use an interest rate of 5%, then the factor would be 10.0266 (as noted in the table below at the intersection of the "5%" column and the "n" row of "8" periods. You would then multiply the 10.0266 factor by $10,000 to arrive at a future value of the annuity of $100,266. Rate Table For the Future Value of an Annuity Due of 1A glance at the table should make clear the massive impact of interest rate compounding over time. For example, the multiplier associated with a 12% interest rate for thirty periods is more than 270, versus a multiplier of only 84 at a 6% interest rate (which is a difference of 3.2x). A series of equal payments made at the same interval at the start of each period What is Annuity Due?Annuity due refers to a series of equal payments made at the same interval at the beginning of each period. Periods can be monthly, quarterly, semi-annually, annually, or any other defined period. Examples of annuity due payments include rentals, leases, and insurance payments, which are made to cover services provided in the period following the payment. The annuity due can be illustrated as follows:  The first payment is received at the start of the first period, and thereafter, at the beginning of each subsequent period. The payment for the last period, i.e., period n, is received at the beginning of period n to complete the total payments due. Summary
Present Value of an Annuity DueThe present value of an annuity due uses the basic present value concept for annuities, except we should discount cash flow to time zero. The formula for the present value of an annuity due is as follows: Alternatively, Where:
The second formula is intuitive, as the first payment (PMT on the right side of the equation) is made at the start of the first period, i.e., at time zero; hence it comes without a discounting effect. Example An individual makes rental payments of $1,200 per month and wants to know the present value of their annual rentals over a 12-month period. The payments are made at the start of each month. The current interest rate is 8% per annum. Using the formula above: FV of the Investment = $1,200 x 11.57 FV of the Investment = $13,886.90 Future Value of an Annuity DueThe future value of an annuity due uses the same basic future value concept for annuities with a slight tweak, as in the present value formula above. To calculate the future value of an ordinary annuity: Where:
Example A company wants to invest $3,500 every six months for four years to purchase a delivery truck. The investment will be compounded at an annual interest rate of 12% per annum. The initial investment will be made now, and thereafter, at the beginning of every six months. What is the future value of the cash flow payments? Using the formula above: FV of the Investment = $3,500 x 10.49 FV of the Investment = $36,719.61 The calculations for PV and FV can also be done via Excel functions or by using a scientific calculator. Annuity Due vs. Ordinary Annuity1. PaymentsThe major difference between annuity due and the more popular ordinary annuity is that payments for an ordinary annuity are made at the end of the period, as opposed to annuity due payments made at the start of each period/interval. Ordinary annuity payments include loan repayments, mortgage payments, bond interest payments, and dividend payments. 2. Present valueAnother difference is that the present value of an annuity due is higher than one for an ordinary annuity. It is a result of the time value of money principle, as annuity due payments are received earlier. Hence, if you are set to make ordinary annuity payments, you will benefit from getting an ordinary annuity by holding onto your money longer (for the interval). Conversely, if you are set to receive annuity due payments, you will benefit, as you will be able to receive your money (value) sooner. In any annuity due, each payment is discounted one less period in contrast to a similar ordinary annuity. The relationship in equation terms can be illustrated as below: PV of an Annuity Due = PV of Ordinary Annuity * (1+i) Multiplying the PV of an ordinary annuity with (1+i) shifts the cash flows one period back towards time zero. The last difference is on future value. An annuity due’s future value is also higher than that of an ordinary annuity by a factor of one plus the periodic interest rate. Each cash flow is compounded for one additional period compared to an ordinary annuity. The formula can be expressed as follows: FV of an Annuity Due = FV of Ordinary Annuity * (1+i) Additional ResourcesThank you for reading CFI’s guide to Annuity Due. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
When the payment is made at the beginning of each period it is called an annuity due?An annuity due is an annuity in which the cash flows, or payments, occur at the beginning of the period. An annuity due is also called an annuity in arrears. The cash flows occur at the beginning of years 1 through 5.
When the payments are made at the end of each payment period the annuity is called?If the periodic payments are made at the end of each period, the annuity is called an immediate annuity or ordinary annuity.
Which payment in an annuity is called?Under the terms of the plan, money paid into the annuity (called “premiums” or “contributions”) is not included in taxable income for the year in which it is paid in. All other tax provisions that apply to nonqualified annuities also apply to qualified annuities.
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When payment are made of the beginning of each period the annuity is called as?
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