Present Value of an Annuity payable times a year

14th February 2020 0 By indiafreenotes

An annuity due is a series of equal consecutive payments that you are either paying as a debtor or receiving as a lender. This differs from an annuity, as an annuity is a form of investment. Annuities are paid at the end of a period, while an annuity due payment is made at the beginning of a period. This payment covers the period to come.

Some examples of this could be a premium on insurance or rent due. If you were renting a house to someone, their monthly payments are an annuity due.

Time Value of Money 

Present value can be a difficult topic to digest. It refers to a concept called “the time value of money”. Time value of money can be explained thusly—if you were given $1 today, it is worth more than the same $1 five years from now. This is due to the changing value of money and inflation, and the potential of money to earn interest.

The present value of an annuity due (PVAD) is calculating the value at the end of the number of periods given, using the current value of money. Another way to think of it is how much an annuity due would be worth when payments are complete in the future, brought to the present.

Calculating the PVAD

For this formula, the following values are used:

P = periodic payment

r = rate per period

n = number of periods

The formula used is:

PVAD = P + P [ (1 – (1 + r) – (n – 1) ) ÷ r ]