1. What is the Ordinary Annuity Formula?

The Ordinary Annuity Formula calculates the present value of a series of equal payments made at the end of consecutive periods. It's used to determine the current worth of future cash flows, accounting for the time value of money.

2. How Does the Calculator Work?

The calculator uses the Ordinary Annuity formula:

Where:

• \( PV \) — Present Value (dollars $)
• \( PMT \) — Payment Amount (dollars $)
• \( r \) — Interest Rate per period (unitless)
• \( n \) — Number of periods (unitless)

Explanation: The formula discounts future cash flows back to their present value using the given interest rate, accounting for the time value of money.

3. Importance of Present Value Calculation

Details: Present value calculation is crucial for investment analysis, loan amortization, retirement planning, and comparing different financial options with cash flows occurring at different times.

4. Using the Calculator

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

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 of each period.

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

Q3: What happens if the interest rate is zero?
A: When r = 0, the formula simplifies to PV = PMT × n, as there's no time value of money to account for.

Q4: Can this formula be used for irregular payments?
A: No, this formula assumes equal periodic payments. For irregular payments, each cash flow must be discounted separately.

Q5: How does compounding frequency affect the calculation?
A: The interest rate (r) and number of periods (n) must match the compounding frequency for accurate results.