1. What is Present Value of Annuity?

The present value of an annuity is the current worth of a series of future payments, discounted at a specific rate. It helps compare annuity payments to lump sum amounts and evaluate investment opportunities.

2. How Does the Calculator Work?

The calculator uses the present value of ordinary annuity formula:

Where:

• \( PV \) — Present value of the annuity (USD)
• \( PMT \) — Periodic payment amount (USD)
• \( r \) — Periodic discount rate (decimal)
• \( n \) — Number of payment periods

Explanation: The formula discounts each future payment back to its present value and sums them all together.

3. Importance of Present Value Calculation

Details: Present value calculations are essential for financial planning, investment analysis, loan amortization, retirement planning, and comparing different financial options.

4. Using the Calculator

Tips: Enter the periodic payment amount in USD, the periodic discount rate as a decimal (e.g., 0.05 for 5%), and the number of periods. All values must be positive.

5. Frequently Asked Questions (FAQ)

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 calculator handles ordinary annuities.

Q2: How do I convert annual rate to periodic rate?
A: Divide annual rate by number of periods per year. For monthly payments with 6% annual rate, use 0.06/12 = 0.005.

Q3: What if my discount rate changes over time?
A: This calculator assumes a constant rate. For variable rates, you'd need to calculate each period separately.

Q4: Can I use this for loan calculations?
A: Yes, this can calculate the present value of loan payments, helping you understand the true cost of borrowing.

Q5: How does inflation affect present value?
A: Higher discount rates (reflecting higher inflation) will result in lower present values for the same future payments.