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Present Value of Ordinary Annuity Formula:
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The present value of an ordinary annuity represents the current worth of a series of equal payments to be made at the end of each period over a specified time frame, discounted at a given interest rate.
The calculator uses the present value of ordinary annuity formula:
Where:
Explanation: This formula discounts each future payment back to its present value and sums them to determine the total present worth of the annuity.
Details: Calculating present value of annuities is essential for financial planning, investment analysis, loan amortization, retirement planning, and comparing different financial options.
Tips: Enter the periodic payment amount in dollars, interest rate as a decimal (e.g., 0.05 for 5%), and 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 occur at the end of each period, while annuity due payments occur at the beginning of each period.
Q2: How is this different from future value calculation?
A: Present value calculates what future cash flows are worth today, while future value calculates what current cash flows will be worth in the future.
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: Can this be used for monthly mortgage calculations?
A: Yes, this formula is commonly used to calculate mortgage present values when payments are made at the end of each period.
Q5: How does compounding frequency affect the calculation?
A: The interest rate (r) and number of periods (n) must match the compounding frequency (annual, semi-annual, quarterly, monthly).