Accounting: the Language of Business - Vol. 2 (Intermediate: Part 110)

“Keep on going, and the chances are that you will stumble on something, perhaps when you are least expecting it. I never heard of anyone ever stumbling on something sitting down.”
— Charles F. Kettering

 Accounting and the Time Value of Money (Part T)

by

Charles Lamson

Deferred Annuities 

A deferred annuity results from a variety of contracts whose payments or receipts are delayed until a future period. For example, a company may receive annual payments of $50,000 for 5 years, but the payments will not begin until 3 years from today. Deferred annuities may require calculating the present value or the future value.

Future Value of a Deferred Ordinary annuity

Computing the future value of a deferred ordinary annuity involves using any of the same methods as when we compute the future value of an ordinary annuity with one difference: We will discount the cash flows only for the number of periods in which the payments occur, not the total period. This is due to the fact that we do not include the deferral period.

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Present Value of a Deferred Ordinary Annuity 

One alternative method to compute the present value of a deferred ordinary annuity is to determine the present value of the cash flows over the period in which the cash flows occur. This present value is then considered as a lump sum receipt (future value or FV) received at the end of the deferral period. Discount this FV back to time period 0 to determine the present value of the deferred ordinary annuity. 

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*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 351-353*

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