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Present Value of Annuity Formula:
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The present value of an annuity is the current worth of a series of future cash flows (payments) given a specified rate of return. It helps determine how much a stream of future payments is worth in today's dollars, accounting for the time value of money.
The calculator uses the present value of annuity formula:
Where:
Explanation: This formula discounts each future payment back to its present value and sums them all together, accounting for the time value of money.
Details: Present value calculations are essential in finance for evaluating investments, retirement planning, loan amortization, and comparing different financial options. It helps determine whether a series of future payments is worth a certain upfront cost.
Tips: Enter the periodic payment amount in dollars, the interest rate per period as a decimal (e.g., 0.05 for 5%), and the total number of payment periods. All values must be positive numbers.
Q1: What's the difference between ordinary annuity and annuity due?
A: Ordinary annuity payments occur at the end of each period, while annuity due payments occur at the beginning. This formula calculates ordinary annuity present value.
Q2: How does interest rate affect present value?
A: Higher interest rates result in lower present values, as future payments are discounted more heavily.
Q3: Can this calculator handle different compounding periods?
A: Yes, but you must ensure the interest rate and number of periods match the same time frame (e.g., monthly payments require monthly rate and number of months).
Q4: What if the interest rate is zero?
A: When interest rate is zero, the present value is simply the sum of all payments (PMT × n).
Q5: How is this different from future value calculation?
A: Present value calculates what future payments are worth today, while future value calculates what current money will be worth at a future date after earning interest.