Final answer:
The future value of an annuity due is calculated by taking the future value of an ordinary annuity and multiplying it by (1 + interest rate), signifying that an additional period of interest is earned due to payments being made at the beginning of each period.
Step-by-step explanation:
The formula for calculating the future value of an annuity due is often derived from the formula for the future value of an ordinary annuity. To adjust for the payment being made at the beginning of each period instead of the end, the future value of an ordinary annuity is multiplied by (1 + interest rate). Therefore, the formula for the future value of an annuity due factor (FVad) can be expressed as:
FVad = FVoa × (1 + interest rate)
Where FVoa represents the future value of an ordinary annuity factor. If an annuity pays at the beginning of each period, the future value will be higher compared to payments made at the end of each period due to the additional period of interest earned. The steps to find the compound interest by determining the difference between the future value and the present value of the principal also apply to annuities. To apply this to a scenario such as a three-year annuity, one would follow the same formula and calculations.