1. What is the Annuity Factor?

The annuity factor is a multiplier used to calculate the present value of a series of future cash flows (an annuity). It represents the present value of $1 received each period for n periods at a discount rate of r.

2. How Does the Calculator Work?

The calculator uses the annuity factor formula:

Where:

• \( r \) — Periodic interest rate (as decimal)
• \( n \) — Number of periods

Explanation: The formula discounts each future payment back to present value and sums them all together.

3. Importance of Annuity Factor

Details: The annuity factor is crucial in finance for valuing annuities, calculating loan payments, determining lease payments, and in pension calculations.

4. Using the Calculator

Tips: Enter the periodic interest rate as a decimal (e.g., 5% = 0.05) and the number of periods. Both values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annuity factor and present value?
A: The annuity factor is the present value of $1 per period. Multiply it by the periodic payment amount to get total present value.

Q2: Can this be used for monthly payments?
A: Yes, as long as the rate and periods match (monthly rate and number of months).

Q3: What happens when the interest rate is zero?
A: The formula simplifies to just n (number of periods) since there's no discounting.

Q4: How does this relate to mortgage payments?
A: The annuity factor is used to calculate the present value of all future mortgage payments.

Q5: What's the perpetuity case?
A: As n approaches infinity, the formula simplifies to 1/r (perpetuity factor).