# Annuity factor

From ACT Wiki

*Financial maths*

(AF).

Annuity factors are used to calculate present values of annuities, and equated instalments.

The simplest type of annuity is a finite series of identical future cash flows, starting exactly one period into the future.

## Present value calculations

An annuity factor can be used to calculate the total present value of a simple fixed annuity.

The Annuity Factor is the sum of the discount factors for maturities 1 to n inclusive, when the cost of capital is the same for all relevant maturities.

Commonly abbreviated as AF(n,r) *or* AF_{n,r}

Sometimes also known as the Present Value Interest Factor of an Annuity (PVIFA).

### Present value

The present value of the annuity is calculated from the Annuity Factor (AF) as:

= AF x Time 1 cash flow.

**Example 1: Present value calculation**

Annuity factor = 1.833.

Time 1 cash flow = $10m.

Present value is:

= AF x Time 1 cash flow

= 1.833 x 10

= $**18.33**m

### Annuity factor calculation

The annuity factor for 'n' periods at a periodic yield of 'r' is calculated as:

AF(n,r) = (1 - (1 + r)^{-n} ) / r

Where

n = number of periods

r =

periodic cost of capital.

**Example 2: Annuity factor calculation**

When the periodic cost of capital (r) = 6%,

and the number of periods in the total time under review (n) = 2.

Annuity factor is:

= (1 - (1 + r)^{-n} ) / r

= (1 - 1.06^{-2} ) / r

= **1.833**

This figure is also the sum of the related Discount Factors (DF):

AF_{2} = DF_{1} + DF_{2}

= 1.06^{-1} + 1.06^{-2}

= 0.9434 + 0.8900

= **1.833**

## Equated instalments

Annuity factors are also used to calculate equated loan instalments.

For a loan drawn down in full at the start, the equated loan instalment is given by:

Instalment = Principal/Annuity factor

**Example 3: Loan instalment**

$20m is borrowed at an annual interest rate of 6%.

The loan is to be repaid in two equal annual instalments, starting one year from now.

The annuity factor is 1.833 (as before).

The loan instalment is:

20 / 1.833

= **$10.9m**

The Annuity Factor is sometimes also known as the *Annuity formula*.

An annuity factor is a special case of a cumulative discount factor (CumDF).

## See also

## Other resources

Ever decreasing circles - using annuity factors to unlock circularity in loan instalments, The Treasurer

Category: Annuity

## Similar articles:

Massachusetts Laborers' Annuity Fund

Formula for the Life of an Annuity With Payouts