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Calculate what equal future payments are worth today, then follow the formula one substitution at a time.
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Ordinary annuity · 5% per period · 7 payments
Step 2
Cash-flow check
Showing the first 6 of 7 equal payments.
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Understand the answer
Payments arrive at the end of each period. Loans and many investment cash flows use this convention.
Payments arrive at the beginning of each period. Because every payment is one period earlier, its present value is higher when the rate is positive.
Match the rate to the payment interval. If cash flows are monthly, use a monthly rate and count months—not years.
Ordinary annuity
Present value of an annuity — Ordinary annuity Payment each period (PMT): $500.00 Rate per period (r): 5% = 0.05 Number of periods (n): 7 Ordinary annuity formula: PV = PMT × [1 − (1 + r)^−n] ÷ r PV = $500.00 × [1 − (1 + 0.05)^−7] ÷ 0.05 Ordinary-annuity PV = $2,893.19 Present value = $2,893.19
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