 
Calculating the Present Value of an Annuity
The basic steps in calculating the present value of an annuity are as
follows:
 Enter the proper payments per year. You first must type in the appropriate
number (eg. monthly would be 12, quarterly would be 4, etc.), then push the
cream colored key , then
the P/YR key.
 The order of the next three steps is not important, but I recommend that
you follow across the financial tour of your calculator from left to right.
If you do this, then the next step would be to enter in the proper number of
years. You first type the appropriate number, then push the cream colored
key , then the xP/YR
key.
 Now enter the appropriate interest rate per year. This is done by entering
the appropriate annual interest rate as a whole number, not as a decimal
(the calculator will convert it to decimal automatically), then pressing the
I/YR key.
 Next enter the amount of the annuity (the payment that occurs every
period) and press the PMT
key.
 Finally all that is necessary is push the PV
key.
Now let's try a problem. Suppose you are interested in making an investment
that pays $1,000 per year at the end of the next five years. What should you pay
for the investment today if you wish to earn 8% annually on your investments?
First let's see what we know. We know that you will receive $1,000 at the end of
the next five years. That indicates that the Payment (PMT) is $1000 since it
reoccurs every period. We know that the number of years (xP/YR) is 5. We know
that the annual interest rate is 8% (8 is the I/YR). Finally, we may assume that
the periods per year is one since we are not told it is monthly, quarterly, etc.
(If the payments per year would have been, for example, monthly, the problem
would have read, ". . . earn 8% per year, compounded monthly.")
Now let's compute the problem:
 First we must enter the appropriate payments per year by pushing 1, then
the P/YR key.
 Next we will enter the number of years by pushing 5, then the cream
colored key , then the
xP/YR key.
 Now we will enter the interest rate per year by pushing 8 and then
pressing the I/YR key.
 Next we enter the Payment by pressing 1000, then the PV
key.
 Finally, we press the PV
key to compute the answer. The display then shows 3992.71 if the display
was set to show two decimal places. Note that the answer is negative.
This indicates that the direction of the cash flow is out. (This is logical
if we will be getting $1000 per year for each of the next five years in the
future, we must pay $3,992.71 now.)
Would you like to review the
mathematics of this calculation?
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