In accounting & finance, we often hear about the term “present value,” which refers to the value of the expected income stream calculated as the valuation date. The alternative name of the present value is the present discounted value. The annuity table is a process that helps in better understanding the annuity worth. Ordinary annuity & annuities due are 2 major types of annuities.
The present value has a strong connection with the annuity table as it’s an instrument used to find out the annuity present value. Annuity tables are used by the insurance panels, actuaries, and accountants to determine how much capital has been placed in annuity and how much capital would be due by an annuitant or annuity buyer. Let’s see in detail how present value and ordinary annuity work together.
The present value of the ordinary annuity table is defined as the sequence of payments that take place at the same interim & in the same aggregate. All deposits are made at the ending of the succeeding period.
The time value of money is matters a lot for the inventors. The capitalist always wants to know that the capital obtained today is valued more than the same aggregate of capital in the upcoming or not. It provides a better idea to investors of which opportunity is better for them.
The buyer does the series of payments such as rent or lease to the seller of asset is one major example. In these agreements, the purchaser pledges for submitting an array of regular deposits. For instance, XYZ wants to import heavy machinery worth $4000 from seller ABC and promises to pay the seller four payments of $1000 at the interval of one payment annually.
How to Calculate the PV of an Ordinary Annuity (PVOA)
The current worth of an annuity is calculated to check the capital value today. This is performed by using the premium rate to discount the value of the annuity. An annuity table shows the procedure to evaluate the annuity present value. The PV can be calculated in two ways;
- Calculation by the use of ordinary table
- Calculation by the use of formula
If someone does not have an electronic calculator, software, or formula, then the most convenient and alternative method to calculate PV is to use an ordinary table. The table includes the period and interest rate percentage.
If you are aware that the annuity is discounted at 6% per period, and there are 5 periods, then look at the PVOA table for the convergence of i=6% and n = 5. You would find out the factor 4.2124. Once you determine the number, you can easily multiply it by the recruiting amount payment. The respective result will represent the PV of an ordinary annuity.
Another way of finding PV is through the equation;
P = PMT x 1 – (1 + r) n / r
In this formula, “P” is the current value of the annuity stream to be submitted in the upcoming future, “r” is the discount or interest rate, PMT represents the payment amount of annuity, and “n” is the number of periods in which payment is required to be submitted.
Let’s consider an individual who has a choice to obtain an annuity of dollar 60,000 per year for the succeeding 15 years, with a lending rate of 5% or a lump-sum deposit worth $550,000. He wants to find out the more reasonable possibility that through the above-mentioned equation, the PVA is determined. Then the comparison of an annuity or lump sum amount would help him decide which option is more profitable.
Advantage of Using Ordinary Annuity Table to Find Present Value
- PVOA is an efficient method to determine the worth of money in present times and future times.
- During financial investments reduces the risk factors and helps in making a better funding decision.
- Provides a good measure of profitability and assumption of reinvestment to the capitalist.
- It is a straightforward technique to analyze how much capital would be needed to generate those future payments.
The present value of an ordinary allowance table is applied to a string of cash. It is well a structured way to determine the worth of money.
In PVOA, the payment is made at the end of each period. If someone wants to invest some amount at the end of the month or year, this is the recommended method to analyze an investment.