An annuity table usually helps people perform calculations relating to a pool of funds that pays a person portions of the money in it periodically, such as lottery winnings or retirement funds. When a person gets money over a period of time that spans between now and a certain time in the future, the total value of the money he or she earns is less compared to if he or she gets the money as a lump sum right now. This is because the money from later payments doesn't earn interest and loses value with inflation. In finance lingo, the present value of the annuity is less than the present value of the lump-sum payment. An annuity table helps people calculate the present value of annuities, taking into account money lost through not earning interest.
An annuity table usually has various interest rates listed along its top line and various numbers of payment periods listed along its left column. To use the annuity table, a person needs to know the interest rate and the number of payment periods during the life of the annuity. He or she finds the corresponding interest rate and number of payment periods in the table to find the annuity factor. The person then multiplies the amount of each payment by the annuity factor to find the present value of the annuity.
For example, consider a man who chooses to get his lottery winnings of $8,000 US Dollars in eight payments of $1,000 USD at the end of every year, and the interest rate is 4 percent. He should find "4 percent" along the top of an annuity table and the numeral "8" along the left column of the same table, then look at the box where the two meet, which should contain the value "6.7327." Multiplying $1,000 USD by 6.7327, he gets $6.732.70 USD, which is the present value of the annuity.
An annuity table simplifies the process of calculating the present value of an annuity, which otherwise involves a complicated formula. The result, however, might not be as accurate as using the formula, depending on how many decimal places the annuity factors have. For simple calculations, the annuity table often is sufficient.
The most common form of an annuity table helps people calculate the present value of an ordinary annuity, which pays at the end of each period. Another type of annuity table helps people work out the present value of an annuity due, which pays at the beginning of each period. Other annuity tables help people find the future value or the maturity value of annuity investments, which allows investors to make periodic payments and get back the lump sum with interest at the end of the specified investment duration.
