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
