Present Value of an Annuity

The present value of annuity is the sum of the present values of all the cashinflows of this annuity.
Present value of an annuity (in case of discrete discounting)
PVA = FV [{(1+r)t – 1 }/ {r * (1+r)t}]

The term [(1+r)t  – 1/ r*(1+r)t] is referred as the Present Value Interest factor for an annuity (PVIFA).

Present value of an annuity (in case of continuous discounting) is calculated as:
PVa = FVa * (1-e-rt)/r
Example 1:What is the present value of Rs. 2000/- received at the end of
each year for 3 continuous years
= 2000*[1/1.10]+2000*[1/1.10]^2+2000*[1/1.10]^3
= 2000*0.9091+2000*0.8264+2000*0.7513
= 1818.181818+1652.892562+1502.629602
= Rs. 4973.704

 

 

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