1. What is the Annuity Formula?

The annuity formula calculates the present value of a series of equal payments made at regular intervals, discounted at a specific interest rate. It's commonly used in finance to determine the current worth of future cash flows.

2. How Does the Calculator Work?

The calculator uses the annuity formula:

Where:

• \( PV \) — Present Value of the annuity
• \( PMT \) — Periodic payment amount
• \( r \) — Interest rate per period (as a decimal)
• \( n \) — Number of payment periods

Explanation: The formula discounts each future payment back to its present value and sums them up to determine the total present worth of the annuity.

3. Importance of Annuity Calculation

Details: Annuity calculations are essential for financial planning, retirement planning, loan amortization, investment analysis, and determining the value of pension plans and insurance products.

4. Using the Calculator

Tips: Enter the periodic payment amount in dollars, the interest rate as a percentage, and the number of payment 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 are made at the end of each period, while annuity due payments are made at the beginning. This formula calculates ordinary annuity present value.

Q2: How does interest rate affect the present value?
A: Higher interest rates result in lower present values because future payments are discounted more heavily.

Q3: Can this formula be used for monthly payments?
A: Yes, but ensure the interest rate is the monthly rate and the number of periods is in months.

Q4: What happens when the interest rate is zero?
A: When r = 0, the formula simplifies to PV = PMT × n, as there's no time value of money.

Q5: How is this different from perpetuity calculation?
A: Perpetuity assumes infinite periods (n → ∞), while annuity has a finite number of periods.