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**Unformatted text preview: **qual cash flows per year ◦ i is the rate of interest per annum ◦ m is the number of compounding per year ◦ n is the number of years Mike White is planning to save up for a trip to Europe in 3 years. He will need $10000 when he is ready to make the trip. He plans to invest the same amount at the end of each of the next 3 years in an account paying 6 per cent. What is the amount he will have to save every year to reach his goal of $10000 in 3 years? Solution:
On Next Slide m=1 Annuity Due
Annuities due
•
Annuity is called an annuity due when there
is an annuity with payment being incurred at
beginning of each period rather than at end
•
Rent or lease payments typically made at
beginning of each period rather than at end Ordinary annuity vs annuity
due Annuity Due
Annuities due
•
Annuity transformation method shows
relationship between ordinary annuity and
annuity due
• Each period’s cash flow thus earns extra
period of interest compared to ordinary
annuity
– present or future value of annuity due is always higher than that of ordinary annuity • Annuity due = Ordinary annuity value (1+i) Annuity
Present Value of Annuity Due PVADue = PVAOrd CF 1
×( 1 + i ) =
× 1 −
×( 1 + i )
n
i (1+i ) ◦ CF is the series of equal cash flows per year ◦ i is the rate of interest per annum ◦ n is the number of years ◦ assuming annual...

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