[thisismyname]

Ok, I feel stupid about asking this. But how do I calculate the present value of an ordinary annuity? The text is telling me the PV of an ordinary annuity of $1 at 10$ for 10 periods is 6.1445. The only formula I’ve been given so far is PV = FV / (1+r)^n, so I’m confused on how they got to 6.1445.

[Y05H1 3GG]

You'll get that Present Value Factor on the FAR/BEC exam and you just have to know which factor to use in different circumstances.

[say]

That is the present value formula. Not the present value of an ordinary annuity.

The present value of an ordinary annuity formula is P = PMT [(1 – (1 / (1 + r)n)) / r]
This is based on routine payments and you have to take that payment and multiply by the factor to get what the total present value is. Usually you don't have to use the formula to get the factors, they are provided, but I think its good to use the formulas so you better understand the factors. Sometimes in problems you will get confused bc they will give you multiple factors to choose from. I always would mess up and pick the wrong one, so I had to teach myself the time value of money formulas and that is how I understood which factor to choose.

[CPAHOPE]

Do not memorize the formula, it is a big waste of time. Become comfortable using the annuity chart to find the answer. Just know the logic behind to using them.

[thisismyname]

Thanks everyone for the replies. I also realized that you can use the PV formula in Excel, which should be available during the test which may make things easier.

[Author]

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