Overview

Main Menu Name: Receipts

Calculates the lump sum of money you must invest to produce an income of $X per year for Y years. It assumes the initial investment is made at the beginning of the year, that no additional withdrawals or investments are made, and that the specified rate of interest does not change throughout the investment period.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

An annuity is a systematic liquidation of principal and interest. The present value of an annuity is the sum of money in current dollars that equals future payments of principal and interest received each year for a specified period at a specified rate of interest.

This calculation is useful for individuals who want to receive $X every year for Y number of years. For example, assume a person wants to receive $10,000 each year for 20 years following his retirement. If 10% could be earned on the invested funds, the investor's initial investment must be a lump sum of $85,136. $10,000 annually for twenty years could be paid to the investor - assuming the 10% rate of return was actually realized. At the end of the twenty years, the fund will be exhausted.

This calculation is also used to determine the current value of any asset that will produce a series of payments in the future on a steady basis at a given interest (discount) rate. An example of such an asset is a lease that will earn a specified amount each year for a specified number of years.

Getting Started

The present value of an annuity is the sum of money in current dollars that equals future income payments received each year for a specified period at a specified rate of interest.

This calculation is useful for individuals who want to receive $X every year for Y number of years. For example, assume a person wants to receive $10,000 each year for 20 years following his retirement. If he earned 10% on the invested funds, his initial investment must be a lump sum of $85,136. He could then receive $10,000 annually for twenty years. At the end of the twenty years, the fund will be exhausted.

This calculation is also used to determine the current value of any asset that will produce a series of payments in the future on a steady basis at a given interest rate. An example of such an asset is a lease that will earn as specified amount each year for a specified number of years.

Entering Data

1. Annual/Monthly Amount Received:  Enter the amount that will be received each year or month from the investment.
2. Effective Interest Rate:  Enter the interest rate applied to the investment.
3. Term Length:  Select if the calculation is based on annual or monthly payments
4. Term (Years/Months):  Enter the number of years or months that funds will be received from the investment.

Results

The calculation results show the present value of a series of future payments. This amount must be invested today if the amount specified at the Annual Amount Received entry field is to be generated. In other words, the calculation determines the lump sum of money which must be invested to produce an income of $X per year for Y years. The calculation also calculates and displays the actual amount received from the series of payments.

In its calculations, the calculation assumes the following: the series of payments continues for the number of years specified at the Number of Years entry field; the rate specified at the Effective Interest Rate entry field applies throughout the payment period; the initial investment is made at the beginning of the period; the same amount of income is paid out each year; and no additional withdrawals or investments are made.