In
this example, if we assume that the interest rate is 6%, then
the present value of the cash flow can be calculated as follows:
| PVA |
= |
[RM100
/ (1.06)1] + [RM100 / (1.06)2] |
| |
= |
RM94.33
+ 89.0 |
| |
= |
RM183.33 |
In order to simplify the calculations, we can also use the
present value interest factor of annuity table (PVIFA) –
see Table 3 in Appendix.
The
present value of an annuity can be calculated using the following
formula:
PVA = PMT x PVIFA (r%, n)
Where,
| PVA |
=
|
present
value of annuity, |
| PMT |
= |
equal
payment, |
| PVIFA
(r%, n) |
= |
present
value interest factor of annuity, for interest rate, r%
and number of periods, n. |
From the PVIFA table, we must first determine the factor for
PVIFA (r%, n); in our example, r = 6%, and n = 2. Hence, looking
down column (6%), the intersection with row (n = 2) across
is 1.833. Using this factor, we can calculate PVA as:
PVA = 100 x 1.833 = RM183.3
Illustrative
example – future value of an annuity
The future value of an annuity (FVA) can also be determined
by compounding the payments individually. For example, the
future value of RM100 to be received at the end of the first
year and RM100 to be received, at the end of the second year,
can be depicted as follows:
|
