Previously, we discussed how to calculate the present value of a single sum that is due or needed at some time in the future. Now we will discuss how to compute the present value of a series of level future payments. This is a present value problem if the payments are made at the beginning of each year.

Retirees want to know how long a specific sum of money will last them, once accumulated. The answers can be found using the factors from the compound discount table titled "One Dollar per Annum" in appendix A.

EXAMPLE

Suppose your 65-year-old client wants to know how much $200,000 will provide him each year over 20 years during retirement. He feels he can earn 6 percent interest on this money, and he will receive the payments at the end of each year.

To determine the answer, you can use the factors from the compound discount table titled "One Dollar per Annum" in appendix A. In this example, you are trying to solve for the income that a present value ($200,000) will generate over 20 years. You can calculate the answer by dividing the lump-sum present value by the appropriate present value of periodic payments (PVPP) factor that corresponds to the 6 percent interest column and the 20th year.

The formula and calculation are as follows:

Annual income = PV ÷ PVPP factor

                          = $200,000 ÷ 11.470

                          = $17,437

Thus, your client will receive $17,437 at the end of each year for 20 years, but he will have exhausted the present value of $200,000 at the end of 20 years.

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