To calculate the current value of your annuity scheme easily and within the shortest time possible, you will require a present value of annuity table. When evaluating your annuity program, you should take into account the money time-value, or its current and future value. In addition, we can employ the current annuity table to compute the prospect flow of annually cash streams from annuity.
An present value of annuity table program includes two phases:
- The accumulation phase and
- The distribution phase
Annuities operate by allowing one group to deposit money into the account while another group pledging to repay it. During the accrual phase, the cash goes into the account, and rewarded during distribution stage. Both phases can be a single payment where, there is minor period between the preceding imbursement made into the account and the initial disbursement made from the account. In case either of the phases is at least two payout, it is an annuity.
Phases of present value of annuity table :
accrual and circulation
Normally, annuity is a venture where a particular party deposits money in account with the second party pledging to pay it back. The accumulation or accrual phase is that time which the cash goes into annuity. Annuity will exist when either of the two phases or stages represents at least two payments. You can work out the current value of the chain of annuity for each payout in the similar mode as for a single sum just by doing the same computation for every payout and then summing the payment together. However, we can compute the annuity present value by using a mathematical formula.
We can employ the following formula to calculate the value of annuity:
X=P*[(1+L) m-1]/ (1+L) m*L
m represents the period numbers
X represent the current or initial principle amount value
P represents the payment made at the end of each period
L represents the rate of discount for every period
In case you do not want to do the calculation by yourself, you can employ a present value immunity table. The current value annuity table allows you determine the present value of fiscal amounts to be paid at a future time. Some tables indicate the present value of annuity table each amount designated for payment at the end of a precise period in the future, with varying rates interests compounded yearly. To utilize the table, look for your selected interest rate amount in the vertical column. After which, you find the number of the needed years to receive payment in the horizontal column. The point of intersection of these two columns presents the dollar value.
The annuity table gives a factor, based on the rate of discount and period, by which we can multiply the annuity payout to find its current value. For instance, we can employ an annuity table to compute the present value of annuity that paid $ 20,000 a year for 10 years, with 3% interest rate projection. You can easily get present value of annuity table online to assist you in calculation. There are many types of annuity table online.
The Present Appraisal of Annuity formula and its Benefits
Knowing the present value of annuity formula will help us to determine what are the wise choices among investments and what choices will make us regret our decisions. This information will make us better investors that it will enable us to spot scams or unworthy investments. By learning this, we will equip ourselves with a better control of our future. Being able to foresee what will investments will yield us is an edge most of us must possess especially of our current financial instability whether the money we invest will accumulate profit or will be wasted as time goes by.
So how to compute for this present value of annuity. The formula follows the fundamentals of time, value and money. When you are calculating for the worth of the annuity, you are the determining the future estimate of your investments based on the interest during the time of you give your retirement investment. The present equivalent of annuity formula does not directly tackle the inflation rate. It will only shows us if the interest rates are proper and will be beneficial for us. The present equivalent of annuity is the value of a series of pending payments that will be accounted for each year.
Real Life Application Example Computation for present value of annuity formula
Let’s say you are willing to invest your personal severance pay of $20,000 with a pension company and they promise to pay you $1200/year for 30 years. Any normal person might believe that it’s a good deal because $1200/year x 30 years = $36,000, which obviously have much more than the original $20,000 investment.
However, by solving the Present Value of Annuity Formula, you will know that the “fair value” projected of this annuity is actually only $18,446 if interest rates will be at 5%… and therefore “overpaying” if you are to pay more than $18,446. It is unfair for you. So if you pay anything more than $18,446, then you’re just as good if you have put your money in the bank likewise, and it will be earning the said interest from the bank. That it will be able to generate at $18,446 the rate of return of your pension will be equal to the rate of return of investing your retired funds in the bank. If you pay more than $18,446 for your investment, then your investment’s rate of return are much than your return from the bank.
Basic Use of the Formula
It is used to compute the amount of a series of payments if it is worth currently where “currently” not necessarily mean now but at some time prior to a specified future time.
In practice using this formula is a valuation mechanism. It presents the value in which the money, time and value is all present in the equation. It is useful in determining the lump sum value of lottery winnings, calculating the value of regular payments in a structured contract, evaluating a flow of retirement payments, establishing the procurement price of a property sold for a regular installment payments. By using the present value of annuity formula will give you insights before you make a decision regarding investments.