Principles of Managerial Finance

166 PART 2 Important Financial Concepts

0 1 2 3 4 5

End of Year

$700

648.20

599.90

555.80

514.50

476.70

$2,795.10

$

Present Value

$700 $700 $700 $700

TABLE 4.2 The Long Method for Finding

the Present Value of an

Ordinary Annuity

Present value

Cash flow PVIF8%,na [(1)(2)]

Year (n) (1) (2) (3)

1 $700 0.926 $ 648.20

2 700 0.857 599.90

3 700 0.794 555.80

4 700 0.735 514.50

5 700 0.681  (^4)  (^7)  (^6) . (^7)  (^0) 
Present value of annuity $

2

,

7

9

5

.

1

0

aPresent value interest factors at 8% are from Table A–2.
Time line for present
value of an ordinary
annuity ($700 end-
of-year cash flows,
discounted at 8%,
over 5 years)
EXAMPLE Braden Company, a small producer of plastic toys, wants to determine the most it
should pay to purchase a particular ordinary annuity. The annuity consists of
cash flows of $700 at the end of each year for 5 years. The firm requires the
annuity to provide a minimum return of 8%. This situation is depicted on the fol-
lowing time line:
Table 4.2 shows the long method for finding the present value of the annuity.
This method involves finding the present value of each payment and summing
them. This procedure yields a present value of $2,795.10.
Using Computational Tools to Find
the Present Value of an Ordinary Annuity
Annuity calculations can be simplified by using an interest table for the present
value of an annuity, a financial calculator, or a computer and spreadsheet. The
values for the present value of a $1 ordinary annuity are given in Appendix Table
A–4. The factors in the table are derived by summing the present value interest