Annuity Factor: Definition, Calculation & Uses

Financial calculators can calculate annuity factors if you know the percentage rate and number of periods

An annuity factor is a financial value that, when multiplied by a periodic amount, shows the present or future value of that amount. Annuity factors are based on the number of years involved and an applicable percentage rate. Most often, the annuity factor is applied to an investment where there is an annual payment or return. An example would be a savings account in which you put $100 in every month. Annuity factor tables are found in the back of most finance textbooks and online. Financial calculators can also calculate annuity factors.

Present Value Annuity Factors

The formula for a present value annuity factor discounts a future value amount to its value in the present by using the applicable interest rate and the number of years the investment will last. For example, if you are promised $1,000 annually for the next 10 years, which you put into a savings account that pays 1 percent interest, today's value would be $1,000 multiplied by the present value annuity factor of 1 percent and 10 years ($1,000 * 9.47130) = $9,471.30. Find the present value annuity factor of 9.47130 by using an annuity factor table, and choose the factor residing at the intersection of your interest rate (1 percent) and number of investment periods (10).

Future Value Annuity Factors

The formula for a future value annuity factor compounds the amount using the applicable rate and the number of years the investment will last. For example, if you deposit $5,000 annually for the next five years in a mutual fund that paid 7 percent, how much would you have in five years? To calculate this, using a table with future value annuity factors, you would multiply $5,000 by the future value annuity factor at the intersection of 7 percent and five years: $5,000 * 5.75074 = $28,753.70.