An annuity due can use the ordinary annuity formula if the ordinary annuity formula is adjusted:
To use the ordinary annuity formula for an annuity due, you need to make an adjustment to the formula. An annuity due is a series of equal cash flows or payments made at the beginning of each period, whereas an ordinary annuity has payments made at the end of each period.
To adjust the ordinary annuity formula for an annuity due, you need to multiply the present value or future value by a factor of (1 + r), where 'r' is the interest rate per period.
Here is a breakdown of the adjustment for the ordinary annuity formula:
1. Present Value of an Annuity Due:
To find the present value of an annuity due using the ordinary annuity formula, you multiply the formula by (1 + r). The formula is:
PV = PMT * [(1 - (1 / (1 + r)^n)) / r] * (1 + r)
2. Future Value of an Annuity Due:
To find the future value of an annuity due using the ordinary annuity formula, you multiply the formula by (1 + r). The formula is:
FV = PMT * [(1 - (1 / (1 + r)^n)) / r] * (1 + r)
By adjusting the ordinary annuity formula using the factor (1 + r), you account for the fact that the payments are made at the beginning of the period in an annuity due.