1. What is Net Present Value of Annuity?

The Net Present Value (NPV) of an annuity is the current value of a series of future cash flows (payments) discounted at a specific rate. It helps evaluate the profitability of investments or compare different financial options.

2. How Does the Calculator Work?

The calculator uses the NPV of annuity formula:

Where:

• \( PMT \) — Periodic payment amount
• \( r \) — Discount rate per period (as decimal)
• \( t \) — Number of periods

Explanation: The formula discounts each future payment back to its present value and sums them all to get the total NPV.

3. Importance of NPV Calculation

Details: NPV is crucial for investment decisions, capital budgeting, and comparing financial options with different time horizons. A positive NPV indicates a profitable investment.

4. Using the Calculator

Tips: Enter the periodic payment amount, discount rate (as percentage), and number of periods. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between NPV and PV?
A: PV typically refers to a single future amount, while NPV refers to a series of cash flows (like an annuity).

Q2: What discount rate should I use?
A: Typically use your required rate of return or the cost of capital. For personal finance, you might use an inflation rate or investment benchmark.

Q3: How does compounding frequency affect NPV?
A: More frequent compounding increases NPV. For non-annual periods, adjust both the rate and number of periods accordingly.

Q4: What does a negative NPV mean?
A: A negative NPV suggests the investment would lose money at the given discount rate.

Q5: Can I use this for irregular payments?
A: No, this calculator assumes equal periodic payments. For irregular payments, you'd need to calculate each period separately.