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Present value of annuity

Excel formula: Present value of annuity
Generic formula 
=PV(rate,periods,payment,0,0)
Summary 

To get the present value of an annuity, you can use the PV function. In the example shown, the formula in C9 is:

=PV(C5,C6,C4,0,0)
Explanation 

The PV function is a financial function that returns the present value of an investment. You can use the PV function to get the value in today's dollars of a series of future payments, assuming periodic, constant payments and a constant interest rate. An annuity is a series of equal cash flows, spaced equally in time

In this example, an annuity pays 10,000 per year for the next 25 years, with an interest rate (discount rate) of 7%. The PV function is configured as follows in cell C9:

=PV(C5,C6,C4,0,0)

The inputs to PV are as follows:

  • rate - the value from cell C7, 7%.
  • nper - the value from cell C8, 25.
  • pmt - the value from cell C6, 100000.
  • fv - 0.
  • type - 0, payment at end of period (regular annuity).

With this information, the present value of the annuity is $116,535.83. Note payment is entered as a negative number, so the result is positive.

Annuity due

With an annuity due, payments are made at the beginning of the period, instead of the end. To calculate present value for an annuity due, use 1 for the type argument. In the example shown, the formula in F9 is:

=PV(F7,F8,-F6,0,1)

Note the inputs (which come from column F) are the same as the original formula. The only difference is type = 1.

Author 
Dave Bruns

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