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  3. apply the concepts: present value of an ordinary a

APPLY THE CONCEPTS: Present value of an ordinary annuity Many times future sums of money...

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Accounting

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APPLY THE CONCEPTS: Present value of an ordinary annuity Many times future sums of money will not come in one payment but in a number of periodic payments. For example, imagine that you want to buy a house and know that you will have periodic mortgage payments and you need to know how much you would have to invest today in order to facilitate all of those payments into the future. This is called an ordinary annuity and it says that a certain value today at a stated interest rate is equal to a certain number of future payouts for a given amount per payment. The following timeline displays how an ardinary annuity pays out when distributed in three equal payments at an annually compounded interest rate of 5% Payment: $6,000 Payment: $6,000 Payment $6,000 Year 1 Year 2 Year 3 Present Value: The most simple and commonly used method of determining the psent value of an ardinary annuity is to multiply the icremental payout by the appropriate rate found on the present value of an ordinary annuity table

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