In: Finance
What is the difference between ordinary annuities, annuities due, perpetuities and uneven cash flows?
In general, annuities are regular &fixed /equal amounts of cash inflows or outflows ,over a period of time. | ||||
COMPARISON ISSUES | Ordinary annuity | Annuities due | Perpetuity | Uneven cash flows |
Meaning | Cash flows occur at the end of the period starting from the period t=1 | Cash flows occur at the beginning of the period starting from t=0 | An annuity that goes on forever | Not equal in amounts of cash flows nor regular in periodicity of their occurence |
Term | Fixed & Specified | Fixed & Specified | Unending-perpetual or indefinite | Fixed & Specified |
Payment/receipt belongs to | the period preceding the date of the cash in/out flow | the period following the date of the cash in/out flow | both are possibilities | both are possibilities |
Present value formula | PV=X*(1-(1+r)^-n)/r | PV=X*(1-(1+r)^-n)/r*(1+r) | PV=X/r | PV=x/(1+r)^1+y/(1+r)4+……z/(1+r)^n |
Future Value formula | FV=X*((1+r)^n-1)/r | FV=X*((1+r)^n-1)/r*(1+r) | Cannot be calculated as n is not known | FV=X*(1+r)^(n-1)+y*(1+r)^(n-4)+…….z |