The present value (PV) of an annuity is used to determine how much a continual set of payments in the future is worth currently. For example, let's say you win a lottery that pays $20,000 a month for four years. While the sum of the annuity payments is $960,000, the total value is actually worth less because of the time value of money. In the example, assume the lotto winner can earn an interest rate of 5 percent. The formula to find a present value factor is PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]; however, you can use the present value of an annuity table to elminate the need for complex calculations.
Determine the term and interest rate. These numbers are used on the Present Value of an Annuity Table to find the Present Value of an Annuity Factor. In our example, the interest rate is 5 percent and the term is 12 months times 4 years, which equals 48 periods.
Find the Present Value of an Annuity Factor on the Present Value of an Annuity Table. In our example, the Present Value of an Annuity Factor equals 18.0772.
Multiply the annual annuity payment by the Present Value of an Annuity Factor. In our example, $20,000 times 18.0772 equals $361,544.
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