An ordinary annuity is a series of annual payments made at the end of each year for a fixed number of years. Annuities with payments at the end of each year are sometimes referred to as regular annuities or simply annuity. Annuity formulas are used to calculate annuity values. The formula to use will depend on which components of the annuity are already known.
Annuity Formulas Examples
The listing below summarizes the various formulas to use for annuity calculations.
In all annuity formulas the following symbols are used.
- FV = Future value
- PV = Present value
- i = Periodic rate
- Pmt = Periodic payment
- n = Number of years
- LN is a natural logarithm
The example used below for each annuity formula is based on the following information.
- Future value = FV = 7,335.93
- Present value = PV = 4,622.88
- Periodic rate = i = 8%
- Periodic payment = Pmt = 1,000
- number of years = n = 6
Future Value of an Annuity
Formula FV = Pmt x ((1+i)n-1)/i Excel Formula FV = -FV(i%,n,Pmt) Example FV = 1000 x ((1+8%)6-1)/8% = 7,335.93
Present Value of Annuity
Formula PV = Pmt x ((1-1/(1+i)n)/i) Excel Formula PV = -PV(i%,n,Pmt) Example PV = 1000*((1-1/(1+8%)6)/8%) = 4,622.88
Calculate Annuity Payments based on Present Value
Formula Pmt = PV/((1-1/(1+i)n)/i) Excel Formula Pmt = PMT(i%,n,-PV) Example Pmt = 4,622.88/((1-1/(1+8%)6)/8%) = 1,000
Calculate Annuity Payment based on Future Value
Formula Pmt = FV/(((1+i)n-1)/i) Excel Formula Pmt = PMT(i%,n,,-FV) Example Pmt = 7,335.93 /(((1+8%)6-1)/8%) = 1,000
Number of years based on Future Value
Formula n = LN(1+FV/Pmt x i)/LN(1+i) Excel Formula n = nPER(i%,Pmt,,-FV) Example n = LN(1+7,335.93/1000 x 8%)/LN(1+8%) = 6
Number of years based on Present Value
Formula n = -LN(1-PV/Pmt x i)/LN(1+i) Excel Formula n = nPER(i%,Pmt,-PV) Example n = -LN(1-4,622.88/1000 x 8%)/LN(1+8%) = 6
The other type of annuity is the annuity due where payments are made at the beginning of each year.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.