Annuity Due - paid cash – Draw the time line 4 Annuity...

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Annuity Due The formula for an ordinary annuity can be modified, as follows: The value of an Annuity Due is equal to 1 0 1 2 3 4 $20,000 $20,000 $20,000 $20,000 $20,000 5 -1 ) 1 ( r) (1 1 - 1 r C PVA t r + + =
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Annuity Due Similar to PVs, which have one fewer period to be discounted , FVs have one additional period for compounding. Consequently, you can multiply both the FV and PV by (1 + r ) to account for the 2
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Cash Flow Timing The PVA formula will value cash flows as of one period before…at any point on the time line. We’ll solve this one in a minute… 3 10 11 12 13 14     $20,000    $20,000    $20,000     $20,000    $20,000 15
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Annuity Due Example You are buying a house. The seller will accept 9, $50,000 annual payments beginning today based on an interest rate of 5% or the equivalent amount today in cash. What would the house cost if you
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Unformatted text preview: paid cash? – Draw the time line. 4 Annuity Due • You are buying a house. The seller will accept nine, $50,000 annual payments beginning today based on an interest rate of 5% or the equivalent amount today in cash. What would the house cost if you paid cash? 5 Another Annuity Due Example… • If you land a big account, you’re promised a $4,000 annual bonus for the next three years. You’d get the first payment right away, save all the bonuses, and earn 10%. How much will you have at the end of three years? 6 Another Annuity Due Example… • If you land a big account, you’re promised a $4,000 annual bonus for the next three years. You’d get the first payment right away, save all the bonuses, and earn 10%. How much will you have at the end of three years? 7...
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