Annuity Due and Ordinary Annuity – Capital Budgeting Techniques
We often encounter situations where we have multiple cash flows of same amount. A very common example of such cash flows is loan repayment plan where borrower is asked to repay the loan by making equal installments over some period of time. Almost all home mortgages, car financing and other consumer loans feature constant payments usually.
A series of level cash flows for a fixed period of time is called annuity. A level stream of cash flows that occurs at the end of each period for a fixed period of time is called and ordinary annuity. While if cash flows occurs at the beginning of each period then it is called annuity due.
Annuities are very common in different financial arrangements therefore, some useful shortcuts are used to determine their values.
Present Value of Annuity formula
PV of Annuity= Payment x (1-PV Factor/r)