The Present Value Ordinary Annuity Formula

Oct 13, 2025 by talynt.org 7 views

Introduction

In finance, the present value of an ordinary annuity formula is a crucial concept used to calculate the current value of a series of future cash flows. The formula is given by $PV = P\left(\frac{1 - (1+i)^{-n}}{i}\right)$ , where $PV$ is the present value, $P$ is the periodic payment, $i$ is the interest rate per period, and $n$ is the number of periods. In this article, we will explore how to find the value of $n$ in the present value ordinary annuity formula when quarterly payments are made for 15 years.

The Present Value Ordinary Annuity Formula

The present value ordinary annuity formula is given by:

$PV = P\left(\frac{1 - (1+i)^{-n}}{i}\right)$

where:

$PV$ is the present value
$P$ is the periodic payment
$i$ is the interest rate per period
$n$ is the number of periods

Quarterly Payments for 15 Years

When quarterly payments are made for 15 years, we need to find the value of $n$ in the present value ordinary annuity formula. Since there are 4 quarters in a year, the total number of periods is 4 x 15 = 60.

Substituting the Values

Substituting the values into the present value ordinary annuity formula, we get:

$PV = P\left(\frac{1 - (1+i)^{-60}}{i}\right)$

Simplifying the Formula

To simplify the formula, we can assume that the interest rate per period is $i = \frac{r}{4}$ , where $r$ is the annual interest rate. Substituting this value into the formula, we get:

$PV = P\left(\frac{1 - (1+\frac{r}{4})^{-60}}{\frac{r}{4}}\right)$

Finding the Value of $n$

To find the value of $n$ , we need to equate the present value formula to the given value of $PV$ . Since we are not given the value of $PV$ , we will assume that the present value is equal to the periodic payment, i.e., $PV = P$ .

Substituting this value into the formula, we get:

$P = P\left(\frac{1 - (1+\frac{r}{4})^{-60}}{\frac{r}{4}}\right)$

Simplifying the formula, we get:

$1 = \frac{1 - (1+\frac{r}{4})^{-60}}{\frac{r}{4}}$

Multiplying both sides by $\frac{r}{4}$ , we get:

$\frac{r}{4} = 1 - (1+\frac{r}{4})^{-60}$

Simplifying the formula, we get:

$\frac{r}{4} = 1 - (1+\frac{r}{4})^{-60}$

Solving for $n$

To solve for $n$ , we need to isolate the term $(1+\frac{r}{4})^{-60}$ . Subtracting 1 from both sides, we get:

$\frac{r}{4} = - (1+\frac{r}{4})^{-60}$

Multiplying both sides by $-1$ , we get:

$-\frac{r}{4} = (1+\frac{r}{4})^{-60}$

Taking the reciprocal of both sides, we get:

$\frac{4}{r} = (1+\frac{r}{4})^{60}$

Finding the Value of $n$

To find the value of $n$ , we need to equate the expression $(1+\frac{r}{4})^{60}$ to the given value of $(1+i)^{-n}$ . Since we are not given the value of $i$ , we will assume that the interest rate per period is $i = \frac{r}{4}$ .

Substituting this value into the expression, we get:

$(1+\frac{r}{4})^{60} = (1+\frac{r}{4})^{-n}$

Simplifying the expression, we get:

$(1+\frac{r}{4})^{60} = (1+\frac{r}{4})^{-n}$

Solving for $n$

To solve for $n$ , we need to equate the exponents of the two expressions. Since the bases are the same, we can equate the exponents:

$60 = -n$

Multiplying both sides by $-1$ , we get:

$-60 = n$

Conclusion

In conclusion, the value of $n$ in the present value ordinary annuity formula when quarterly payments are made for 15 years is $n = \boxed{60}$ .

References

[1] Investopedia. (2022). Present Value of an Ordinary Annuity Formula.
[2] Khan Academy. (2022). Present Value of an Ordinary Annuity Formula.

Note

Frequently Asked Questions

In this article, we will answer some of the most frequently asked questions about the present value of an ordinary annuity formula.

Q: What is the present value of an ordinary annuity formula?

A: The present value of an ordinary annuity formula is a mathematical formula used to calculate the current value of a series of future cash flows. It is given by $PV = P\left(\frac{1 - (1+i)^{-n}}{i}\right)$ , where $PV$ is the present value, $P$ is the periodic payment, $i$ is the interest rate per period, and $n$ is the number of periods.

Q: What is the difference between an ordinary annuity and an annuity due?

A: An ordinary annuity is a series of equal payments made at the end of each period, while an annuity due is a series of equal payments made at the beginning of each period.

Q: How do I calculate the present value of an ordinary annuity?

A: To calculate the present value of an ordinary annuity, you need to use the present value ordinary annuity formula: $PV = P\left(\frac{1 - (1+i)^{-n}}{i}\right)$ . You need to know the periodic payment $P$ , the interest rate per period $i$ , and the number of periods $n$ .

Q: What is the significance of the interest rate per period $i$ in the present value ordinary annuity formula?

A: The interest rate per period $i$ is a crucial component of the present value ordinary annuity formula. It represents the interest rate that is applied to each payment period. The higher the interest rate, the lower the present value of the annuity.

Q: How do I determine the number of periods $n$ in the present value ordinary annuity formula?

A: The number of periods $n$ is the total number of payment periods. It can be calculated by multiplying the number of years by the number of payment periods per year. For example, if you want to calculate the present value of an annuity that pays quarterly for 15 years, the number of periods would be 15 x 4 = 60.

Q: What is the relationship between the present value of an ordinary annuity and the future value of an annuity?

A: The present value of an ordinary annuity and the future value of an annuity are related but distinct concepts. The present value of an annuity represents the current value of a series of future cash flows, while the future value of an annuity represents the future value of a series of equal payments.

Q: Can I use the present value ordinary annuity formula to calculate the present value of an annuity due?

A: No, the present value ordinary annuity formula is used to calculate the present value of an ordinary annuity, not an annuity due. To calculate the present value of an annuity due, you need to use a different formula.

Q: What are some common applications of the present value ordinary annuity formula?

A: The present value ordinary annuity formula has many applications in finance, including:

Calculating the present value of a series of future cash flows
Evaluating the present value of an investment
Determining the present value of a loan or debt
Calculating the present value of an annuity

Conclusion

In conclusion, the present value of an ordinary annuity formula is a powerful tool used to calculate the current value of a series of future cash flows. By understanding the formula and its components, you can make informed decisions about investments, loans, and other financial transactions.

References

[1] Investopedia. (2022). Present Value of an Ordinary Annuity Formula.
[2] Khan Academy. (2022). Present Value of an Ordinary Anuity Formula.

Note

The present value ordinary annuity formula is a mathematical formula used to calculate the current value of a series of future cash flows. It is a crucial concept in finance and has many applications in evaluating investments, loans, and other financial transactions.