Question

Comment on some situations where you would use the present value of ordinary annuity table.

Answer 1

An annuity is a series of payments that occur at the same intervals and in the same amounts. An example of an annuity is a series of payments from the buyer of an asset to the seller, where the buyer promises to make a series of regular payments. For example, ABC Imports buys a warehouse from Delaney Real Estate for $500,000 and promises to pay for the warehouse with five payments of $100,000, to be paid at intervals of one payment per year; this is an annuity.

You might want to calculate the present value of the annuity, to see how much it is worth today. This is done by using an interest rate to discount the amount of the annuity. The interest rate can be based on the current amount being obtained through other investments, the corporate cost of capital, or some other measure.

An annuity table represents a method for determining the present value of an annuity. The annuity table contains a factor specific to the number of payments over which you expect to receive a series of equal payments and at a certain discount rate. When you multiply this factor by one of the payments, you arrive at the present value of the stream of payments.