## Present Value of Annuity:

An annuity is a streak of payments or deposits occurring for a certain time horizon at equal intervals. The present worth of an annuity is predominantly governed by the relevant interest rate.

The calculated present worth of the winnings is 7,044.42 The real discount rate is given by: {eq}\begin{align*} &= \text{Nominal discount rate - inflation rate} \\[0.3 cm] &= 6.3\% - 3.1\% \\[0.3 cm] &= 3.2\% \end{align*} {/eq} The present worth of the annual payments is given by: {eq}P\, = \dfrac{1\, -\, \left ( 1\, +\, i \right )^{-n}}{i}\times R {/eq} Where; R = annual payment in real terms =2,500

i = real interest rate = 3.2%

P = Present value

n = number of years = 3

{eq}P\, = \dfrac{1\, -\, \left ( 1\, +\, 0.032 \right )^{-3}}{0.032}\times 2,500 {/eq}

P = \$7,044.42

How to Calculate the Present Value of an Annuity

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Chapter 8 / Lesson 3
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Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.