Present Value of Ordinary Annuity
The Present Value of an Ordinary Annuity (PVoa) is the value of a stream of anticipated or anticipated future payments that have been discounted to a single equivalent value today. It is very useful for comparing two separate cash flows that differ in some way.
PV-oa can also be considered as the amount investor must invest today at a specific interest rate so that when investor withdraw an equal amount each period, the original principal and all accumulated interest will be entirely exhausted at the end of the annuity.
The Present Value of an Ordinary Annuity could be solved by computing the present value of each payment in the series employing the present value formula and then sum up the results. The formula is:
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PVoa = PMT [(1 - (1 / (1 + i)n)) / i]
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Where:
PVoa = Present Value of an Ordinary Annuity
PMT = Amount of each payment
i = Discount Rate Per Period
n = Number of Periods
Use of Present Value Annuity Factor Formula
The present value annuity factor is employed for simplifying the process of computing the present value of an annuity. A table is employed to find the present value per dollar of cash flow son basis of the rate per period and number of periods. Once the value per dollar of cash flows is found, the actual periodic cash flows can be multiplied by the per dollar amount to find the present value of the annuity.
For example, an individual is wanting to compute the present value of a series of $500 annual payments for 5 years based on a 5% rate. Depending on the present value annuity factor table, the annuity factor for 5 years and 5% rate is 4.3295. This is the present value per dollar experienced per year for 5 years at 5%. Thus, $500 can then be multiplied by 4.3295 to obtain a present value of $2164.75.
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