2. Present Value of an Ordinary Annuity The current worth of future payments from an annuity, assuming
Question:
2. Present Value of an Ordinary Annuity
The current worth of future payments from an annuity, assuming a defined rate of return, or discount rate, is called the present value of an annuity. The smaller the present value of the annuity, the higher the discount rate.
Ordinary annuities are a series of equal payments made at the conclusion of each period for a set period of time. Loans, such as mortgages, are examples of regular annuities. If you are taking a Home loan from ANZ Fiji under the type Residential investment property loan- The variable rate would be 7% p.a.
The present value formula for an ordinary annuity has three variables. The following are the details:
PMT stands for "period cash payment."
n = the total number of periods r = the interest rate, the present value of an ordinary annuity is:
- Present Value = PMT x ((1 - (1 + r) ^ -n ) / r)
For example, if a five-year regular annuity pays $50,000 per year and the interest rate is 7%, the present value is:
- Present Value = $50,000 x ((1 - (1 + 0.07) ^ -5) / 0.07) = $205,010
I have used this but my lecturer said to use :
please change this as the residential property loans are usually 25-30years with fortnightly to monthly payments (so why not take your fortnightly payments of around $400 and calculate for n periods (25x 26) and rate 0.07/26 rather then $50 000)
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones