The simple formula to calculate the present value of all the payments:
The simple formula to calculate the present value of all the payments in arrears is:
P((1-(1/i)^n)/i)
(I)= interest rate,
(P)= payment,
(N)= number of time periods.
Note that this formula is not the one that takes into account survial of a person which requires survival tables of data.
Present Value of An Annuity
Present value of an annuity is the value of your money today supposing you receive all your future cash flows today.
Hence, it does not include interest which you are supposed to earn. The amount represents just your principal.
Future value of an annuity is the value of your money in the future supposing you invest your money.
Hence, the amount includes interest which you eventually earn by investing it.
Another Example:
Present value is what all the money is worth today. If you won the lottery they will pay you 25K/year or something like that, but over time what is that money worth to you today after interest and etc.?
This of course is just the simplest of present value. It gets more complicated but they usually give factor charts.
One way of calculating this is to see what the money today would be worth in a year’s time.
Let’s say you get 3% on your money and let’s say you have $1000. In one years time your $1000 will be worth $1030 (simple interest).
So effectively the $1000 you may get next year is only worth $970 at todays values).