Enter the periodic payment, interest rate per period, and the number of periods into the calculator to determine the present value of an ordinary annuity.
Present Value Of Ordinary Annuity Formula
The following formula is used to calculate the present value of an ordinary annuity.
PV = PMT * ((1 - (1 + r)^(-n)) / r)
Variables:
- PV is the present value of the ordinary annuity (USD)
- PMT is the periodic payment (USD)
- r is the interest rate per period
- n is the number of periods
To calculate the present value of an ordinary annuity, multiply the periodic payment by the factor ((1 – (1 + r)^(-n)) / r), where r is the interest rate per period, and n is the number of periods.
What is an Ordinary Annuity?
An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time. It’s a common financial product used in retirement plans and loans. The present value of an ordinary annuity is the total value of all future payments discounted to their value today, considering a specific interest rate.
How to Calculate Present Value of an Ordinary Annuity?
The following steps outline how to calculate the Present Value of an Ordinary Annuity.
- First, determine the periodic payment (PMT) in USD.
- Next, determine the interest rate per period (r).
- Next, determine the number of periods (n).
- Next, gather the formula from above = PV = PMT * ((1 – (1 + r)^(-n)) / r).
- Finally, calculate the Present Value (PV) in USD.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Periodic payment (PMT) = $1000
Interest rate per period (r) = 5%
Number of periods (n) = 10