Explanation of the Topic...
Present Value of an
|Part 1||Introduction to the Present Value of an Ordinary Annuity, Components of a Present Value Calculation|
|Part 2||Present Value of an Ordinary Annuity (PVOA)|
|Part 3||Present Value Formula, Tables, and Calculators|
|Part 4||Calculating the Present Value of an Ordinary Annuity (PVOA)|
|Part 5||Calculating the Payment in an Ordinary Annuity (PMT)|
|Part 6||Calculating the Length of an Ordinary Annuity (n)|
|Part 7||Calculating the Rate (i) in an Ordinary Annuity|
|Part 8||PVOA Used in Recording a Transaction and Amortizing Discount|
IMPORTANT! Understand that each financial calculator operates differently and MAY OPERATE IN A MANNER THAT IS DIFFERENT FROM OUR EXPLANATION. Be certain to read and THOROUGHLY UNDERSTAND the directions before operating any calculator or computer software. One incorrect assumption, one incorrect input, or the use of a button that works differently from what you assumed, will mean an incorrect answer—and that could have a significant financial consequence!
PVOA = PMT times [ PVOA factor for n = 10; i = 8% ]If you are familiar with our topic Present Value of a Single Amount, you will notice that the result here is the same as if we had discounted each of the $1,000 payments by using a PV of 1 Table and then summed the ten present value amounts. Rather than doing those ten calculations, however, the PVOA Table has combined for us the 10 factors from the PV of 1 Table—this allows us to compute the present value with just one multiplication. Note that this is possible only when each of the ten payments is identical in amount. (If the ten payments varied in amount, we could not use the annuity table; we would have to calculate the present value of a single amount for each of the ten payments and then sum the ten present value amounts.)
PVOA = $1,000 times [ 6.710 ] ← PVOA factor from PVOA Table
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