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Unformatted text preview: nnuity due are always
greater than the future value and the present value, respectively, of an otherwise
identical ordinary annuity.
Because ordinary annuities are more frequently used in finance, unless otherwise specified, the term annuity is used throughout this book to refer to ordinary
annuities. In addition, discussions of annuities in this book concentrate on ordinary annuities. For discussion and computations of annuities due, see the book’s
Web site at www.aw.com/gitman. 144 PART 2 Important Financial Concepts TABLE 4.1 Comparison of Ordinary Annuity
and Annuity Due Cash Flows
($1,000, 5 Years)
Annual cash flows End of yeara
0 Annuity A (ordinary)
$ Annuity B (annuity due) 0 $1,000 1 1,000 1,000 2 1,000 1,000 3 1,000 1,000 4 1,000 1,000 5 1,000 0 Totals $5,000 $5,000 aThe ends of years 0, 1, 2, 3, 4, and 5 are equivalent to the beginnings of years
1, 2, 3, 4, 5, and 6, respectively. Finding the Future Value of an Ordinary Annuity
The calculations required to find the future value of an ordinary annuity are illustrated in the following example.
EXAMPLE Fran Abrams wishes to determine how much money she will have at the end of 5
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