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Future value (FV) is a measure of how much a series of regular payments will be worth at some point in the future, given a specified interest rate. So, for example, if you plan to invest a certain amount each month or year, it will tell you how much you’ll have accumulated as of a future date. If you are making regular payments on a loan, the future value is useful in determining the total cost of the loan.

Our focus throughout this topic will be on ordinary annuities—streams of equal cash amounts that are received or paid at the end of future periods. We’ll discuss calculations that determine present value, interest rate, and/or the length of time needed for identical payments to occur. The present value (PV) of an annuity is the current value of future payments from an annuity, given a specified rate of return or discount rate. It is calculated using a formula that takes into account the time value of money and the discount rate, which is an assumed rate of return or interest rate over the same duration as the payments. The present value of an annuity can be used to determine whether it is more beneficial to receive a lump sum payment or an annuity spread out over a number of years.

## Calculating the Future Value of an Ordinary Annuity

Immediate annuities start paying out right away, while deferred annuities have a delay before payments begin. In contrast to the future value calculation, a present value (PV) calculation tells you how much money would be required now to produce a series of payments in the future, again assuming a set interest rate. So, let’s assume that you invest $1,000 every year for the next five years, at 5% interest.

- Despite this, present value tables remain popular in academic settings because they are easy to incorporate into a textbook.
- The annuity table provides a quick way to find out the present and final values of annuities.
- Except for minor differences due to rounding, answers to the exercises below will be the same whether they are computed using a financial calculator, computer software, PV tables, or formulas.
- In present value calculations, future cash amounts are discounted back to the present time.
- The reason the values are higher is that payments made at the beginning of the period have more time to earn interest.

John earned a bachelor’s degree in journalism from the University of Kansas and a master’s degree in communication from Southern New Hampshire University. “Essentially, a sum of money’s value depends on how long you must wait to use it; the sooner you can use it, the more valuable it is,” Harvard Business School says. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. Again, please note that the one-cent difference in these results, $5,801.92 vs. $5,801.91, is due to rounding in the first calculation. Note that the one-cent difference in these results, $5,525.64 vs. $5,525.63, is due to rounding in the first calculation.

## Components of a Present Value Calculation

Present value is an important concept for annuities because it allows individuals to compare the value of receiving a series of payments in the future to the value of receiving a lump sum payment today. By calculating the present value of an annuity, individuals can determine whether it is more beneficial for them to receive a lump sum payment present value of ordinary annuity tables or to receive an annuity spread out over a number of years. This can be particularly important when making financial decisions, such as whether to take a lump sum payment from a pension plan or to receive a series of payments from an annuity. An annuity is a series of payments that occur at the same intervals and in the same amounts.

But if you want to figure out present value the old-fashioned way, you can rely on a mathematical formula (with the help of a spreadsheet if you’re comfortable using one). Using the present value formula helps you determine how much cash you must earmark for an annuity to reach your goal of how much money you’ll receive in retirement. On the other hand, an “ordinary annuity” is more so for long-term retirement planning, as a fixed (or variable) payment is received at the end of each month (e.g. an annuity contract with an insurance company). To find the present value of ordinary annuity find the appropriate period and rate in the tables below. What follows is an example of an annuity table for an ordinary annuity (meaning the payment is made at the end of the month.) Typically, the data in each annuity table is the same.

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