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Present Value of Ordinary Annuity:
The present value of an
ordinary annuity
is the
single sum
that, if invested at compound
interest now would provide for an annuity (a series of withdrawals) for a certain number
of future periods – the PV of an ordinary annuity is the PV of a series of equal rents, to
withdrawal at equal intervals
Example:
What is the PV of rental receipts of 6000 (Periodic Rent) each, to be received at the end
of each of the next 5 years (periods) when discounted at 12% (Int. Rate)?
PV= Periodic Rent * (number from the table using 5 as N and .12 as I)
Present Value of an Annuity Due:
There are ALWAYS
one
fewer
discount period with annuities due compared to an
ordinary annuity – this is because you are making one pmt right at the beginning –
to
find the PV of an annuity due factor, multiply the PV of an ordinary annuity by 1 +
the interest rate
Examples of Present Value Ordinary Annuity Problems:
1.
Computation of the Present Value of Ordinary Annuity
You have just won a lottery totaling 4,000,000 – you will receive a check in the amount
of 200,000 at the end of each of the next 20 years – what is the amount you have really
won??
This is asking for what is the present value of the 200,000 checks you will receive over
that next 20? (Assume appropriate int rate of 10%)
You can calculate this in the following ways:
PV of Ordinary Annuity = Periodic Rent (200,000)* #from table (8.51356)
PV of Ordinary Annuity =
1,702,712
What this means is that the state can deposit 1,702,712 NOW and earns 10%
interest, it can withdraw 200,000 a year for 20 years to pay you the 4,000,000 that
you won.
2.
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This note was uploaded on 11/15/2010 for the course SPMT SPMT 217 taught by Professor Tibedeax during the Spring '10 term at Texas A&M.
 Spring '10
 tibedeax

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