15.9 Discounting annuities Flashcards
1
Q
What is an annuity?
A
A series of fixed payments made at regular time intervals during a specified period of time.
2
Q
What is an annuity factor?
A
A number used to calculate the present value of an annuity. It is the sum of all other discount rates and is based on the number of years involved and an applicable rate of return or discount rate.
3
Q
How is present value of an annuity calculated?
A
PV = Annual cash flows x annuity factors
4
Q
How is an annuity factor calculated?
A
AF = [1 - (1 + r)^-n] / r
Where
r = discount rate
n = number of periods in which period will be made
5
Q
What is a perpetuity?
A
A type of annuity of a constant stream of cash flow that continues indefinitely.
