You are provided with two time-value-of-money tables. One table provides factors for the present value of an ordinary annuity and the other provides factors for the present value of an annuity due. How can you tell which table is which type?
What will be an ideal response?
Answer: An ordinary annuity is an annuity where the cash flows occur at the end of the interest period and an annuity due is an annuity where the cash flows occur at the beginning of the interest period. Therefore, for any given number of periods, the present value factor for an ordinary annuity is always smaller than the corresponding factor for an annuity due. For the first period, the factor for an annuity due is always 1.0 for any interest rate while the factor for an ordinary annuity is always less than one (one divided by one plus the interest rate).
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Indicate whether the statement is true or false