Present value of an annuity or Present value factor annuity is used to identify the value of future cash flows on present value. This method is feasible only when the cash flow is constant.
This can be formulated as fallows,
PVA = [(1+K)^(n-1)] / [k * (1+K)^n]
Where,
PVA = Present Value Annuity
K = Discount rate
N = Number of years
For example,
Mr. X has receivable of Rs.1,000 annually for 3 years, each receipt is expected to be at the end of the years. Prevailing rate of discount is 10% .
Thus the PVA is calculated as
PVA = 1,000 * { [(1+.10)^(3-1)] / [0.10* (1+0.10)^3] }= 1,000*2.487 = Rs.2,487.
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