How to Calculate Present Value of Annuity
What is Present Value of Annuity?
The present value of an annuity is the current worth of a series of future equal payments, discounted at a given rate. Used to value pension streams, lease obligations, lottery winnings, and structured settlements.
Step-by-Step Guide
- 1PV = PMT × (1 − (1+r)^(−n)) / r
- 2PMT = periodic payment, r = discount rate per period, n = number of periods
- 3Higher discount rates reduce present value (future cash flows are worth less today)
- 4Annuity due (payments at beginning): PV × (1+r)
Worked Examples
Input
$1,000/month for 20 years at 5% discount rate
Result
PV = $151,525
Worth more as a lump sum today
Input
$2,000/month pension for 25 years at 6%
Result
PV = $255,282
The actuarial value of the pension
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