Using Present Value Annuity Tables
When analyzing your annuity plan, you should consider the time-value of money, or its present value and future value. A present value annuity table is a useful shortcut for computing the current value of your annuity plan. A present value annuity table can also be used to determine the future stream of yearly cash flows from an annuity.
Phases of an Annuity
An annuity plan has two separate phases: the accumulation phase and the distribution phase. Annuities work by having one party put money into the account with another party promising to pay it back. Money goes into the account during its accumulation phase, and it is paid out during the distribution phase. Either of the phases may be a single payment in which there is very little time duration between the last payment made into the account and the first payout made from the account. If either of the phases is more than a single payment, it is an annuity.
Annuity Phases: Accumulation & Distribution
We said an annuity is usually an investment where one party puts money in with the promise of the other paying it back. The time when money is going into the annuity is the accumulation phase. The money comes back out during the distribution phase. If either of the phases represents more than a single payment, an annuity exists. You can figure out the present value of the series of annuity payments in the same way as for a single amount just be performing the same calculation for each payment and then adding the payments together. However, the present value of an annuity can be determined by using a mathematical formula.
To determine the present value of an annuity, use the following formula:
PV = Pymtn * [(1+i)n - 1] / (1+i)n * i
- PV represents the present value or initial principal amount
- Pymtn represents the payment made at the end of each period
- i represents the discount rate for each period
- n represents the number of periods.
If you don’t want to do the calculations yourself, you can use a present value annuity table.
Present Value Annuity Tables
The present-value of future payments table lets you determine the present or current value of monetary amounts to be paid at a future time. Some tables show the current worth of each dollar designated for payment at the end of a specified period in the future, with different rates of interest compounded annually.
To use the table, you find your interest rate amount in the vertical column, then find the number of years required to receive the payment in the horizontal column. The place at which these columns intersect is the present value of the dollar. Many present value annuity tables are available online and ready for you to use.
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