An annuity factor is a multiplier used to determine how much money will be paid out in the future at specific points of time under an annuity agreement. The simplest type of annuity is a defined series of identical future cash flows, starting exactly one period into the future. Using an annuity factor is a quick and easy way to determine the cash flows and to compare various annuity options.
It is also known as the present value of an annuity. Each annuity factor is unique based on the interest rate, the sequence, and the number of payments that will be made. This calculation will give you a factor to determine the amount of money that will be paid based on the starting amount. This example uses TValue to show you how to create an annuity factor.
Let’s assume you have a $100,000 annuity at 5% that is going to be paid over 10 years and you want to determine the annuity factor. First, we have to calculate the annual payments. Using TValue, you would select a Compounding Period of Annual and enter a Nominal Annual Rate of 5%. Enter an Invest Event for 100,000 and then use Return on line 2 to solve for the payment. Enter “U” for the Amount, 10 for the Number, and Annual for the Period.
This will calculate a payment of 12,950.46. If you divide 100,000 by the 12,950.46, you get an annuity factor of 7.7217. If you have an annuity at any price with a 10-year program and a 5% interest rate, you can use this factor to determine your annual cash flows: just divide the desired amount by 7.7217 to get your payment.
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