Definition of Annuity Due

Annuity due is a series of exact same amounts of cash flows with the first cash flow starting immediately. It is like the first installment paid as a down payment on the inception of a lease agreement.

Assume that you lease a car from a bank that has a 10 years installment plan with the first installment starting from now. The Installment amount is set to be $10000 a year and the interest rate implicit is 12%.

To find out the present value of an annuity we use present value interest factor of annuity also called PVIFA. As the annuity associated with the car lease is an annuity due the formula for calculating PVIFA is:

To find out the current worth of the car based on the installment plan we will simply multiply the annuity amount with PVIFA.

PV = Annuity x PVIFA

PV = $10,000 x 6.3282 = $63,282