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Present Value of Annuity Formula:
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The present value of an annuity calculates the current worth of a series of equal payments made at regular intervals, discounted at a specific interest rate. It helps determine how much a future stream of payments is worth in today's dollars.
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 to determine the total current worth of the annuity stream.
Details: Present value calculations are essential for financial planning, investment analysis, loan amortization, retirement planning, and comparing different financial options with cash flows occurring at different times.
Tips: Enter the monthly payment amount in dollars, the monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and the total number of months. All values must be positive numbers.
Q1: What's the difference between present value and future value?
A: Present value calculates what future cash flows are worth today, while future value calculates what current money will be worth at a future date with compound interest.
Q2: How do I convert annual interest rate to monthly?
A: Divide the annual rate by 12. For example, 6% annual becomes 0.06/12 = 0.005 monthly rate.
Q3: What types of annuities does this formula work for?
A: This formula works for ordinary annuities where payments are made at the end of each period. For annuities due (payments at beginning), the formula is slightly different.
Q4: Can this be used for loan calculations?
A: Yes, this is commonly used to calculate loan present values, where the monthly payment is known and you want to find the loan amount.
Q5: 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), as there's no time value of money discounting.