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Present Value of an Annuity - DCF Technique
An individual investor may not necessarily acquire a lump sum after several years however rather obtain a constant periodic amount that is an annuity for specific number of years. The current value of an annuity obtainable where the investor time preference is 10 percent equal to:
Pv (A) = A / (1+i)
I = time preference rate
As an example of
Pv of 1/= to be obtained after 1 year if time preference rate is 10 percent.
1/ (1+0.1) = 0.909
After 2 years it will be: A / (1+i)2 = 1/(1.1)2 = 0.8264
1st year - 0.9090
2nd year - 0.8264
3rd year - 0.7513
4th year - 0.6830
Total - 3.1697
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