This free online Present Value Annuity Calculator will calculate the present value of an annuity starting with either a future lump sum, or with a future payment amount.
Plus, this online annuity calculator will calculate present value for either an ordinary annuity, or an annuity due, and display a year-by-year chart so you can see the how the balance will decline to zero over the course of the entered number of years.
If you are not sure what present value is, or you wish to calculate present value for a lump sum only, please visit the Present Value of Lump Sum Calculator.
Or, if you would like to calculate the future value of an annuity, please visit the Future Value Annuity Calculator -- which also includes answers to What is Annuity? and Annuity Due Vs. Ordinary Annuity? in case you're not familiar with the terms used on this page.
Present value of an annuity is a time value of money formula used for measuring the current value of a future series of equal cash flows.
The two most popular uses are for calculating loan payments and for calculating retirement funding needs. Both use the same formula, it's just that they work in opposite directions.
For example, if you would like have enough money in a retirement account so that you can withdraw $2,000 per month for twenty years, and you believe you can earn 6% on your money, present value calculations will tell you that you will need to have $279,161.54 in your retirement account on the day you retire.
Conversely, if you wanted to take out a $279,161.54 mortgage for a home on a 6%, 20-year monthly repayment term, present value calculations with tell you that your monthly payments will be $2,000.00.
Continuing with the above example, if you multiply the number of mortgage payments by the number of payment periods, you will find that the total of all monthly payments for the 20-year mortgage add up to $480,000 ($2,000 x 12 months x 20 years). That's $200,838.46 more than the $279,161.54 you borrowed!
So why are you paying back so much more than you borrowed? The difference is the result of compounding interest. And in the case of a mortgage loan, interest is being compounded on the entire amount you owe each time you make a payment. This means you are being charged interest on the same borrowed dollars many times over. In fact, by the time you pay back the last dollar you owe to the mortgage company, you will have been charged the full annual interest rate on that dollar 20 times. Ouch!
On the other hand, if you could manage to accumulate $279,161.54 in an account earning 6% compounding interest, you could withdraw $2,000 from the account every month for 20-years -- which is $200,838.46 more than you started out with!
Again, that is the due to compounding interest. But in this case YOU are the lender who is charging the borrower interest over and over again on many of the dollars you loaned them. And the most important thing to be aware of in this scenario, is that the different between receiving $200,838.46 more than you lend and paying out $200,838.46 more than you borrow is actually $401,676.92 (+$200,838.46 - -$200,838.46 = $401,676.92)! This is why it's so important to be on "the right side of the compounding interest equation."
With that, let's use the Present Value Annuity Calculator for calculating present value of annuity starting with either a future sum or with a future payment amount.
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Type of annuity: Select the type of annuity. An Annuity Due indicates payments are received or made at the beginning of each period, whereas an Ordinary Annuity indicates payments are received or made at the end of each period. As its name implies, an ordinary annuity is the most common of the two types, and is nearly always the type used for calculating loan payments.
Starting future value: Choose whether you would like to calculate the present value of an annuity starting with a future lump sum or starting with future payment amount, then enter the corresponding future value amount. Lump sum present value annuity calculations are typically used for calculating loan payments, where you start with a future lump sum or loan amount and work backwards to find the payment amount. Present value of a future payment amount are typically used for calculating retirement savings needed to generate the desired retirement income, where you start with a desired payment amount and work backwards to find the deposit amount needed.
Payment/withdrawal frequency: Select the payment/deposit frequency you want the present value annuity calculator to use for the present value calculations.
Number of years to calculate present value for: Enter the number of years you would to calculate present value for.
Present value discount rate: Enter the annual present value discount rate to be used for the present value calculations. Please enter as a percentage (for .06, enter 6%). Note that the present value annuity calculator will convert the annual discount rate to the rate that corresponds to the payment frequency. For example, if you selected a monthly payment frequency, the present value annuity calculator will divide the annual rate by 12.
Present value of an annuity: Based on your entries, this is the present value of the annuity you entered information for. If you chose to enter a future lump sum, this result represents the periodic payment amount needed to repay a loan within the specified time period. Or, if you chose to enter a future payment amount, this result represents the amount you would need to deposit now in order to be able to withdraw the payment during each period interval over the course of the entered number of years.
Total of annuity payments/withdrawals: Based on your entries, this is the total of all payments received (annuity) or made (loan) -- depending on whether you chose to calculate present value starting with a future lump sum, or starting with a future payment amount.
Compound interest earned/paid on annuity: Based on your entries, this is how much compound interest will be earned or paid on the annuity or loan.