Financial Management

Time Value of Money - Annuities

Time Value of Money
A. Ordinary Annuity vs. Annuity Due
B. Perpetuity
C. Complex Cash Flows
Annuity
• An annuity
a series of equal dollar payments that are made at the end of equidistant points in time (such as
monthly, quarterly, or annually) over a finite period of time (such as three years).
• Ordinary annuity
an annuity which payments are made at the end of each period

• Annuity due
an annuity in which all the cash flows occur at the beginning of each period
(e.g. rent payments on apartments are typically annuities due because the payment for the month’s rent
occurs at the beginning of the month)
Future Value of Ordinary Annuity
 
Present Value of Ordinary Annuity
 

 
Future Value of Annuity Due
• 
Present Value of Annuity Due
• 
Solving Using Spreadsheet
Use the formula:
• FV(rate, nper, pmt, [pv], [type])
• PV(rate, nper, pmt, [fv], [type])
• RATE(nper, pmt, pv, [fv], [type], [guess])
• NPER(rate, pmt, pv, [fv], [type])
• PMT(rate, nper, pv, [fv], [type])

[type] 0 or omitted for ordinary annuity, 1 for annuity due

Amortized Loan & Amortization Schedule
• An amortized loan
a loan paid off in equal payments, the loan payments are an annuity (e.g. home mortgage loans,
auto loans)
• Example: You plan to obtain a $6,000 loan from a furniture dealer at 15% annual interest
rate that you will pay off in annual payments over four years.
Perpetuity
• 
Complex Cash Flow Streams
• The cash flows streams in the business world may not always involve one
type of cash flows.
• The cash flows may have a mixed pattern of cash inflows and outflows,
single and annuity cash flows.
   

   

   

   

   

   
Reference
• Financial Management, Principles and Applications,
2018, Titman, Keown, Martin, Pearson, 13E