1. What is the Current Annuity Formula?

The current annuity formula calculates the present value of a perpetuity - a stream of equal payments that continue indefinitely. This formula is used to determine the current worth of an infinite series of future payments.

2. How Does the Calculator Work?

The calculator uses the current annuity formula:

Where:

• \( PV \) — Present Value of the annuity
• \( PMT \) — Periodic payment amount
• \( r \) — Interest rate (as a decimal)

Explanation: This formula calculates how much a series of infinite equal payments is worth today, given a specific discount rate.

3. Importance of Present Value Calculation

Details: Present value calculation is crucial in finance for evaluating investments, retirement planning, and comparing different financial products. It helps determine the current worth of future cash flows.

4. Using the Calculator

Tips: Enter the periodic payment amount in dollars and the interest rate as a percentage. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a perpetuity?
A: A perpetuity is a type of annuity that pays an infinite series of equal payments at regular intervals.

Q2: When is this formula applicable?
A: This formula is used for investments with infinite life, such as certain types of bonds, preferred stocks, or endowment funds.

Q3: How does interest rate affect present value?
A: Higher interest rates result in lower present values, as future payments are discounted more heavily.

Q4: Are there limitations to this formula?
A: Yes, it assumes constant payments forever and a constant discount rate, which may not reflect real-world conditions.

Q5: Can this be used for finite annuities?
A: No, for finite annuities, a different formula that accounts for the finite number of payments should be used.