1. What is the Annuity Formula?

The annuity formula calculates the present value of a series of equal payments made at regular intervals, discounted at a specific rate of return. It's commonly used in finance to determine the current worth of future cash flows from investments, loans, or retirement plans.

2. How Does the Calculator Work?

The calculator uses the annuity formula:

Where:

• \( PMT \) — Periodic payment amount ($)
• \( r \) — Rate of return per period (as decimal)
• \( n \) — Number of periods

Explanation: The formula discounts each future payment back to present value using the specified rate of return, accounting for the time value of money.

3. Importance of Annuity Calculation

Details: Accurate annuity valuation is crucial for retirement planning, investment analysis, loan amortization, and determining the fair value of financial products that involve regular payments.

4. Using the Calculator

Tips: Enter the periodic payment amount in dollars, the rate of return as a percentage, and the number of periods. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between ordinary annuity and annuity due?
A: Ordinary annuity payments occur at the end of each period, while annuity due payments occur at the beginning. This calculator assumes ordinary annuity.

Q2: How does the rate of return affect the annuity value?
A: Higher discount rates result in lower present values, as future payments are discounted more heavily.

Q3: Can this calculator handle different compounding periods?
A: The calculator uses the rate per period. Ensure your input rate matches the payment frequency (annual rate for annual payments, etc.).

Q4: What if the rate of return is zero?
A: When r = 0, the formula simplifies to PMT × n (simple sum of all payments).

Q5: Is this suitable for perpetuity calculations?
A: No, this formula is for annuities with a finite number of periods. For perpetuities, use PMT/r.