Present value of an annuity - dcf technique, Finance Basics

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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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