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Ordinary Annuity Formula:
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The Ordinary Annuity formula calculates the present value of a series of equal payments made at the end of each period over a specified time frame. It's commonly used in finance to determine the current worth of future cash flows.
The calculator uses the Ordinary Annuity formula:
Where:
Explanation: The formula discounts each future payment back to its present value and sums them up, accounting for the time value of money.
Details: Calculating present value is essential for investment analysis, loan amortization, retirement planning, and comparing different financial options with varying payment schedules.
Tips: Enter the periodic payment amount in dollars, interest rate as a percentage (e.g., 5 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 are made at the end of each period, while annuity due payments are made at the beginning of each period.
Q2: Can this calculator handle different compounding periods?
A: This calculator assumes the interest rate matches the payment period. For different compounding, adjust the rate accordingly.
Q3: 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).
Q4: How accurate is this calculation for real-world applications?
A: The formula provides a theoretical present value. Real-world applications may require adjustments for fees, taxes, and other factors.
Q5: Can this be used for mortgage calculations?
A: Yes, this formula is fundamental to mortgage calculations, though actual mortgages may include additional factors like insurance and taxes.