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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, given a specified rate of return. It helps determine how much you would need to invest today to receive a specific payment stream in the future.
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: Calculating present value of annuity is crucial for retirement planning, loan amortization, investment analysis, and comparing different financial options with cash flows occurring at different times.
Tips: Enter the periodic payment amount in dollars, interest rate as a decimal (e.g., 0.05 for 5%), and the 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 do I convert annual percentage rate to decimal?
A: Divide the percentage rate by 100. For example, 5% becomes 0.05 as a decimal.
Q3: What if my interest rate is 0%?
A: The calculator handles this special case by simply multiplying the payment amount by the number of periods.
Q4: Can I use this for monthly payments?
A: Yes, but ensure all inputs use consistent time periods (monthly payment, monthly interest rate, and number of months).
Q5: How does compounding frequency affect the calculation?
A: The formula assumes the interest rate matches the payment frequency. For different compounding, you'd need to adjust the rate accordingly.