Present Value of Annuity Calculator

Introduction

An Annuity is a finite set of sequential cash flows. This type of finite set of sequential cash flows can be seen in loan repayments, monthly rent payments, pension payments, etc. Our present value of annuity calculator helps you determine the value of all future annuity cash flows in today’s terms.

The difference between a perpetuity and an annuity is that an annuity is a finite set of cash flows, but a perpetuity is an infinite set of cash flows.

You can use the present value calculation to value these finite sets of sequential cash flows.

Present Value (PV) is the current value of a future cash flow or stream of cash flows. These cash flows are discounted at an appropriate discount rate reflecting the investment’s expected return and risk profile.

How to use this calculator?

Using the Present Value of Annuity Calculator, you can calculate the present value of the Annuity cash flows.

You have to input the other variables required for the calculation.

The variables in the calculator are:

Cash Flow
The cash flow is received as part of the annuity.

Discount Rate
The rate at which the cash flows should be discounted. This could be interest rates or an appropriate rate reflecting the investment’s expected return and risk profile.

Number of periods
The number of periods for which the cash flows are received.

Present Value
The investment’s value right now is at the current point in time.

What is an Annuity?

An annuity is a series of equal payments made at regular intervals, in other words, a finite set of sequential cash flows.

To illustrate, some examples of annuities include insurance, pension, and mortgage payments. Even deposits into your savings account are also a form of an annuity.

Generally, annuities are provided by insurance companies for retirement planning, principal protection, legacy planning and also for their health care costs.

What is Present Value?

The present value refers to discounting future cash flows using an appropriate rate of return reflecting the return and risk profile of the investments or cash flows to obtain its value in today’s terms.

Determining the appropriate discount rates to discount the cash flows is in fact key to determining the value of the asset or investment.

One of the core principles in finance is that a sum of money is worth more now than the same sum of money at a future date. This is due to its earning potential and this is called as the Time Value of Money.

There are two primary reasons that support this theory:

1. The opportunity cost of capital: The investment opportunities that the investors forgo by choosing a particular course of action. When the capital that the investor has could be invested into other projects and could possibly earn a higher return over time.
2. Inflation: The effects of inflation are also another risk to consider which actually erodes the return on investment and thereby future cash flows lose their value.

Investors and financial planners need to find the present value of investments to understand the equivalence of cash flows at different dates or points in time. Hence, this will help them make their investment decisions accordingly.

How is the Present Value of an Annuity Calculated?

The present value of an Annuity is calculated using the following formula.

Present Value of Annuity Formula

Where,

C → Cash flow received in every period.

r → Discount rate in % Per Annum. The rate at which the cash flows should be discounted. This could be interest rates or an appropriate rate reflecting the investment’s expected return and risk profile.

n → Time Period in Years. This is the number of periods during which we receive the cash flows.