This annuity calculator computes the present value of a series of equal...show more instructions
What Is The Present Value Of An Annuity?
Which would you prefer: $10,000 today or $10,000 received in annual $1,000 installments over the course of 10 years? Instinctively, you probably would choose to receive money right now rather than later.
And yes, you should choose to receive money right now – but for more reasons than “I just couldn’t wait.”
It’s important to remember that $10,000 today is worth more than $10,000 received over the course of time. In other words, the purchasing power of your money decreases in the future.
The Present Value of Annuity Calculator applies a time value of money formula used for measuring the current value of a stream of equal payments at the end of future periods. This is also called discounting.
The present value of a future cash-flow represents the amount of money today, which, if invested at a particular interest rate, will grow to the amount of the sum of the future cash flows at that time in the future.
Present Value Of Annuity Calculation
Below you will find a common present value of annuity calculation. Studying this formula can help you understand how the present value of annuity works. For example, you’ll find that the higher the interest rate, the lower the present value because the greater the discounting.
C = Cash flow per period (payment amount)
i = Interest rate
n = Number of payments (in this calculator, derived from the payment interval and number of years)
When Is The Present Value Of Annuity Calculator Used?
The most common uses for the Present Value of Annuity Calculator include calculating the cash value of a court settlement, retirement funding needs, or loan payments.
For example, a court settlement might entitle the recipient to $2,000 per month for 30 years, but the receiving party may be uncomfortable getting paid over time and request a cash settlement. The equivalent value would then be determined by using the present value of annuity formula. The result will be a present value cash settlement that will be less than the sum total of all the future payments because of discounting (time value of money).
Real estate investors also use the Present Value of Annuity Calculator when buying and selling mortgages. The mortgage represents a future payment stream combining interest and principal that can be discounted back to a present cash value to allow the investor to know how much that mortgage is worth on a mathematical basis. This shows the investor whether the price he is paying is above or below expected value.
Present value calculations can be complicated to model in spreadsheets because they involve the compounding of interest, which means the interest on your money earns interest. Fortunately, our present value annuity calculator solves these problems for you by converting all the math headaches into point and click simplicity. I hope it helps you make smarter financial decisions.
Present Value Of Annuity Calculator Terms & Definitions
- Annuity – A fixed sum of money paid to someone – typically each year – and usually for the rest of their life.
- Payment/Withdrawal Amount – This is the total of all payments received (annuity) or made (loan) receives on the annuity. This is a stream of payments that occur in the future, stated in terms of nominal, or today’s, dollars.
- Annual Interest Rate (%) – This is the interest rate earned on the annuity. The present value annuity calculator will use the interest rate to discount the payment stream to its present value.
- Number Of Years To Calculate Present Value – This is the number of years over which the annuity is expected to be paid or received.
- Payment/Withdrawal Frequency – The payment/deposit frequency you want the present value annuity calculator to use for the present value calculations. The interval can be monthly, quarterly, semi-annually or annually.
- Present Value Of An Annuity – Based on your inputs, this is the present value of the annuity you entered information for. The present value of any future value lump sum and future cash flows (payments).
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