# PVAn = R/(1 + i)1 + R/(1 + i)2

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## PVAn = R/(1 + i)1 + R/(1 + i)2

• PVAn = R/(1 + i)1 + R/(1 + i)2
• + ... + R/(1 + i)n
• R R R
• 0 1 2 n n+1
• PVAn
• i%
• . . .
• Overview of an Ordinary Annuity – PVA

## PVA3 = \$1,000/(1.07)1 + \$1,000/(1.07)2 + \$1,000/(1.07)3

• PVA3 = \$1,000/(1.07)1 + \$1,000/(1.07)2 + \$1,000/(1.07)3
• = \$934.58 + \$873.44 + \$816.30 = \$2,624.32
• \$1,000 \$1,000 \$1,000
• 0 1 2 3 4
• \$2,624.32 = PVA3
• 7%
• \$934.58
• \$873.44
• \$816.30
• Example of an Ordinary Annuity – PVA
• Cash flows occur at the end of the period

## The present value of an ordinary annuity can be viewed as occurring at the beginning of the first cash flow period, whereas the future value of an annuity due can be viewed as occurring at the end of the first cash flow period.

• The present value of an ordinary annuity can be viewed as occurring at the beginning of the first cash flow period, whereas the future value of an annuity due can be viewed as occurring at the end of the first cash flow period.
• Hint on Annuity Valuation
• PVAn = R (PVIFAi%,n) PVA3 = \$1,000 (PVIFA7%,3) = \$1,000 (2.624) = \$2,624
• N: 3 Periods (enter as 3 year-end deposits)
• I/Y: 7% interest rate per period (enter as 7 NOT .07)
• PV: Compute (Resulting answer is positive)
• PMT: \$1,000 (negative as you deposit annually)
• FV: Not relevant in this situation (no ending value)
• N
• I/Y
• PV
• PMT
• FV
• Inputs
• Compute
• 3 7 –1,000 0
• 2,624.32
• Solving the PVA Problem

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