Friday, July 26, 2013

What is Present Value and Future Value of annuity


Introduction                                                                                      
In finance theory,an annuity is a terminating stream of fixed payments. The valuation of such stream  of payments entails concepts such as the time value of money,interest rate and future value .Basically Annuity are regular deposits to a savings account, monthly home mortgage payments and monthly insurance payments. Annuities are classified by the frequency of payment dates. The payments or deposits may be made weekly, monthly, quarterly, yearly, or at any other interval of time.

Financial Manger always confronted with opportunities to earn positive rate of returns on their investment.For this the timing of cash outflow and cash inflow has important economic value,which financial mangers explicitly recognize as the time value of money.Time value is based on the concept that dollar today is worth more than the dollar that will be received at some future date.Because a dollar can be invested and earn a days of worth of interest. Our study of time value in finance,considering the two views of time value,present value and future value of money.The time value of money is the most important concept in finance ,which normally use to increase the better rate of return on the basis of present value and future value concepts.

Present Value And Future Value Of Money

Present value is also known as present discounted rate,is  a future amount of money that has been discounted to reflect its current value,as if it existed today.The preset value is always less than or equal to the future value because money has interest earning potential,a characteristic  referred to as a time value of money.
Present value calculation similarly future value calculation are used to value loans,annuity,mortgage,sinking fund ,perpetuity and more. 

Techniques Of Present Value And Future Value

Present Value Technique measures cash flow at the start of the projects life.(zero Period).Future Value Technique measure cash flow at the end of the projects life.