Future Annuity Present Value Formula

Future Annuity Present Value Formula

Present value of Future annuity may be calculated by the following formula

C x (Annuity Factor) x Discount Factor

Future Annuity Example

Annuity 50,000 ( 6-8)

Discount Rate = 5%

Solution

In first place we would determine the time line

0	1	2	3	4	5	6	7	8
						50,000	50,000	50,000

1.    Calculate the annuity at year 5

= 1-(1.05)^-3

        .05

=2.723

= $ 50,000 x 2.7232

=136160

2.    Discount the present value at year zero

0	1	2	3	4	5
					136,160

$ 136,160 x (1+.05)^-5

=$136,160 x .7835

=106,681

Tip of future annuity

One your discount for term of annuity i.e. 3 Year

Discount further for year Zero i.e. 5 Year

Total Discounting 3+5 =8 Years

Method 2

Annuity Factor 8 year      6.4632

Annuiy Factor 5 Year       4.3294

Annuity factor (6-8)         2.1338

50,000 x 2.1338

=106,690