Recall, that the future value of an ordinary annuity can be used to calculate the future value of a stream of payments that are received at the end of each year, using the following formula:
Compared to an ordinary annuity, payments for an annuity due are received at the beginning of each period. Due to this extra time that the payments have to compound, we can modify the ordinary annuity formula with the addition of the quantity (1 + r) to calculate the future value of an annuity due as follows:
Where:
PMT = payment
r = rate
n = periods
Assume that an individual was to invest $1,000 over a period of 10 years, in a security with a 7% rate of return, and the investment was made at the beginning of each year. We can calculate the future value of the investment as follows:
Using an HP12C calculator, we can calculate the future value of an annuity due using the variables above as follows:
[g][BEG]
[1000][PMT]
[7][i]
[10][n][FV]
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