The present value of an annuity represents the sum that must be invested now to guarantee a desired payment in future while the future value of an annuity is the amount to which current investment will grow over time

Understanding Present Value and Future Value of Annuity
Present Value (PV) and Future Value (FV) of an annuity are critical concepts in finance, particularly when evaluating investment opportunities or retirement planning.
What is Present Value of Annuity?
- Definition: Present Value of an annuity calculates how much a series of future payments is worth today.
- Purpose: It helps investors determine the current worth of future cash flows, discounted at a specific interest rate.
- Use Cases: Commonly used in loan amortization, retirement plans, and valuing investments.
What is Future Value of Annuity?
- Definition: Future Value of an annuity measures how much a series of cash flows will be worth at a specified future date, based on a certain interest rate.
- Purpose: It assists in determining how much an investment will grow over time with regular contributions.
- Use Cases: Often used in savings plans, investment assessments, and financial projections.
Key Differences
- Time Perspective:
- PV focuses on today’s value of future cash flows.
- FV looks at the value of cash flows at a future date.
- Calculation Basis:
- PV discounts future payments back to the present using a discount rate.
- FV compounds the cash flows forward using an interest rate.
- Implication:
- PV is vital for assessing current investments.
- FV is crucial for planning future financial goals.
Understanding these concepts helps in making informed financial decisions and planning effectively for the future.