An annuity is a series of fixed payments over a definitive period of time. Because an annuity is a guaranteed stream of payments, you can calculate the present value of the annuity, otherwise known as the annuity sum. To calculate the annuity sum, you can use an annuity table. You also need to find out the interest rate used by the annuity to calculate present value. This number is generally predetermined by the issuer of the annuity and is supposed to be a representation of the expected rate of inflation per year.

Determine the interest rate used by the annuity to determine present value. You can find the interest rate factor in the documentation prepared by the issuer of the annuity. Alternatively, you can ask the issuer of the annuity for the interest rate factor.

Obtain an annuity table (see Resources).

Find the vertical column on the annuity table that corresponds to the interest rate factor used by the annuity. For example, if the interest rate factor is 5 percent, you would use the "5 Percent" column on the annuity chart.

Find the horizontal column on the annuity table that corresponds to the number of periods that the annuity is paid out. Using the same example, if the annuity is paid out annually for 20 years, you would use the horizontal column labeled "20."

Find the number on the annuity table that's located at the intersection of the horizontal and vertical columns you're using based on the annuity. Using the same example, note the factor of 12.4622 from the annuity table.

Multiply the factor from the annuity table by the fixed annuity payment each period. Using the same example, if the annuity payment is $60,000, multiply $60,000 times 12.4622 to get $747,732. This figure represents the annuity sum or the present value of the annuity.

References

Writer Bio

Since 1992 Matt McGew has provided content for on and offline businesses and publications. Previous work has appeared in the "Los Angeles Times," Travelocity and "GQ Magazine." McGew specializes in search engine optimization and has a Master of Arts in journalism from New York University.