Annuity Due | Lecture Note - Edubirdie

University:
California State University, Northridge
Course:
ACCT 220 | Introduction to Financial Accounting
Academic year:

2024
Views:

441

Pages:

1
Author:

gewoekerdodx

What is an annuity due? It is an annuity wherer the first payment is made immediately (think of it as a down-payment). An example might be a long term lease, where the first payment is due at the beginning of the lease term. You will not encounter annuities due too often in accounting, but they do crop up sometimes and it is necessary to know what to do. Remember, the only difference between an ordinary annuity and an annuity due is that payments are made at the beginning of the period, not at the end of the period. However, since the end of period 1 is simultaneously the beginning of period 2, it is really only the first payment that causes problems: Question: what is the present value of three payments of $100 each. The payments will be received at the beginning of this year (now) and at the beginning of each of the next two years. We want to earn 10% interest on our investment. We could express this as follows: receive Option 1: PV Factor answer: beginning of year 1 $100.00 (10%,0) 1 $100.00 beginning of year 2 $100.00 (10%,1) 0.9091 $90.91 beginning of year 3 $100.00 (10%,2) 0.8264 $82.64 $273.55 Notice what happend: The first payment has a present value of $100 because it is received NOW. The other two payments are discounted as of the end of the first period and second period respectively. Option 2: (that's what we really want to use) Using the PV factor for an annuity due (D39, Nikolai): 2.735537 $100 * PVa due (3,10%) = $100 * 2.735537 = $273.55 Note the PV factor for an annuity due (D39, Nikolai): 2.735537. It is determined exactly like ordinary annuity factors by adding up the individual present value factors Because of the fact that payments are received earlier, the present value of an annuity due is always higher than the present value of an ordinary annuity: Ordinary annuity (payment received a the end of the first period) • • $ 100 * PVa (3, 10%) = $ 100 * 2.486852 = $248.69 Annuity due: Payment received at the beginning of the first period: • • $ 100 * PVa due (3, 10%) = $ 100 * 2.735537= $273.55 What to do if you do not have access to a present value factor table for annuities due (or calculator)? No problem, the factor can easily be calculated as follows: (Using the table on D38) PVa due (10%,3) = 1 + PVa (10%,3) = 1 + 1.735537 = 2.735537 This is all you need to know of present value for accounting for now. BUT You really, really need to know this. Therefore go on to the examples and then practice, practice, practice.

Related Documents

Annuity Due

Annuity Due - Page 1

of 1

Recommended Documents

AM Session FinQuiz Mock 2020 Version 1 Solutions

AM Session FinQuiz Mock 2020 Version 1 Solutions

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Learning Module 1: Basics of Multiple Regression

Learning Module 1: Basics of Multiple Regression

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Answer Key

Learning Module 1 - Free Cash Flow Valuation (EOC)

Learning Module 1 - Free Cash Flow Valuation (EOC)

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Answer Key

Learning Module 1 - Intercorporate Investments (EOC)

Learning Module 1 - Intercorporate Investments (EOC)

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Answer Key

Learning Module 1 - Pricing and Valuation of Forward Commitments (EOC)

Learning Module 1 - Pricing and Valuation of Forward Commitments (EOC)

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Answer Key

Ethical Guidelines for Management Accountants: Conflicts and Resolution

Ethical Guidelines for Management Accountants: Conflicts and Resolution

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Learning Module 1 - Economics and Investment Markets (EOC)

Learning Module 1 - Economics and Investment Markets (EOC)

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Answer Key

Cost Analysis and Contribution Format in Accounting

Cost Analysis and Contribution Format in Accounting

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Cost Behavior Analysis and Use Cost Behavior

Cost Behavior Analysis and Use Cost Behavior

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

ACCT 220. Solutions – Chapter 6

ACCT 220. Solutions – Chapter 6

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Assignment

Capital Budgeting Decisions, Part 2

Capital Budgeting Decisions, Part 2

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

The Effects of Transactions on Financial Statements

The Effects of Transactions on Financial Statements

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Assignment

New Documents from this Course

Customer Relationship Management System

Customer Relationship Management System

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Info Auditing: Ethics in IT Governance

Info Auditing: Ethics in IT Governance

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Financial Stability Analysis: Bellway vs. Barratt

Financial Stability Analysis: Bellway vs. Barratt

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

R&D in Accounting: Challenges & Insights

R&D in Accounting: Challenges & Insights

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Bond Portfolio Advancements: Institutional Groups and Market Trends

Bond Portfolio Advancements: Institutional Groups and Market Trends

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Debit Analysis: Evaluating Financial Stability and Risk

Debit Analysis: Evaluating Financial Stability and Risk

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Linkages and Differences: Managerial vs. Financial Accounting

Linkages and Differences: Managerial vs. Financial Accounting

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Reading 5: Currency Exchange & Equilibrium

Reading 5: Currency Exchange & Equilibrium

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Reading 35: ETF Mechanics & Application

Reading 35: ETF Mechanics & Application

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Reading 1: Quants Multiple

Reading 1: Quants Multiple

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

PM Session FinQuiz Mock 2020 Version 1 Solutions

PM Session FinQuiz Mock 2020 Version 1 Solutions

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Lecture Note

Examples for Learning Module 1 - Intercorporate Investments

Examples for Learning Module 1 - Intercorporate Investments

California State University, Northridge ACCT 220 | Introduction to Financial Accounting

Answer Key