Present Value of an Annuity Example

John is considering investing in a cash flow that will provide him with equal payments of $100 at the end of each year for the next 5 years. This type of cash flow is known as an annuity. If the discount rate for his investment is 5%, what is the present value of this annuity?

To calculate the present value (PV) of an annuity, we can use the formula:

$$ PV = P imes rac{1 - (1 + r)^{-n}}{r} $$

where:

• $P$ = payment per period
• $r$ = discount rate per period
• $n$ = total number of payments