PRESENT VALUE OF AN ORDINARY ANNUITY

PRESENT VALUE OF AN ORDINARY ANNUITY

The present value dollar amount at the beginning of a stream of equal payments that are to be made at the end of each period.

In an ordinary annuity, a stream of equal payments is made through time. If it is necessary to state the future values of the payments stream in present value terms, each future payment must be discounted to a present value and the present values summed up to arrive at a present value of the ordinary annuity.

The payments can be either cash inflows or cash outflows.  If the payments are inflows, the present value is assumed to be an outflow.  If the payments are outflows, the present value is assumed to be an inflow.

In the calculation of present values of ordinary annuities, Present  Value Interest Factors for Annuities (FVIFA) are used to facilitate the calculations.

Be sure to see the text book assignments for more information on this topic.