The Present Value of an Annuity of $1 per period is the current value of a regular periodic payment to be received in the future. The annuity is discounted to an equivalent current value by a discount rate based on the premise that a lump sum received sooner is more valuable than a periodic payment received later.
The Present Value of and Annuity of $1 factor is generally column 4 of the compound interest table. It may be labeled Present Value of and Annuity of $1.
To calculate the present value of an ordinary annuity, multiply the amount of the annuity by the factor from the appropriate compound interest table.
Roger will receive $10,000 per year for 5 years. Assuming a discount rate of 7%, what is the current value of the annuity?
$10,000 per year is the annuity to be received in the future. Using the discount rate of 7% estimates the today's value of the annuity.
An Appraisal Application:
Roger owns a warehouse that he can rent for $10,000 per year. In 5 years the building and land will be worthless. Assuming a discount rate of 6%, what is the value of the property now.