How to Calculate an Annuity Due

How to Calculate an Annuity Due

An annuity is a stream of equal payments over equal time intervals. Payments made at the beginning of each period are known as Ordinary; however, payments made at the end of the period are known as Annuity Due. The valuation for each annuity can be easily converted by using the future value formula. An ordinary annuity can be converted by compounding for one additional period. The challenge is both understanding the formula (if you're unfamiliar with it) and determining the payment amount, interest rate, and number of payments to input into the formula. There are many online calculators available to help verify your calculation.

Review the formula. The formula for the future value of an ordinary annuity is: FV(OA) = PMT * [((1 + i)^n - 1) / i ]. The Future Value of an annuity due is FV(AD) = FV(OA) * (1 + i). Here, PMT = period payment, i = the interest rate, and n = the number of payments.

Define your variables. Let's say you have an annuity that pays 25 equal installments of $1,500 every month at a rate of 6 percent. Substitute the variables into the equation. The calculation for the future value of an ordinary annuity is: 1,500 [((1 + 0.06)^25 - 1)/0.06].

Calculate the value of an annuity due. The answer breaks down to: 1,500 [((1.06)^25 - 1)/0.06] or 1,500 [(4.29 - 1)/0.06] or 1,500 [(3.29)/0.06]. The final answer is $82,296.77.