Annuity
In investment appraisal an annuity means a cash-flow pattern, rather than only an insurance or retirement product. An ordinary annuity has payments at the end of each period, starting one period from the valuation date. Its present value is the constant payment multiplied by [1 − (1 + r)^−n]/r. An annuity due starts immediately and has one additional period of value, so multiply the ordinary-annuity value by (1 + r). A delayed annuity must be discounted back from the date one period before its first payment.
Worked example
A project pays $4,000 at the end of each of four years. At 10%, the annuity factor is 3.169865 and present value is $12,679.46. If the same four payments occur immediately and at the next three year ends, present value becomes $12,679.46 × 1.10 = $13,947.41.
Common mistake
Using an annuity factor without checking when the first payment occurs or whether the amounts are equal.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |