Present Value of an Annuity - Hindi - YouTube

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Namaskar my name is Mukul

And you are welcome to the Asset Yogi

Where we unlock the knowledge of finance

In this video, how to calculate the present value with an annuity

We'll understand that.

This video is part of a video series where we are discussing the time value of money

First, we understood the basics of the time value of money

Then we made three videos on the future value where we learned the future value with a

one-time payment, future value with an annuity, future value with uneven cash flow

Then I made a video on the present value.

We learned how to calculate the value of the single cash flow

In this video, we will see, assume the present value

If you earn regular cash flow at regular intervals

Assume every month in your business

You earn 1 lakhs Rs

How will we calculate its present value?

Assume we want to calculate it for 20 years

If you earn 1 lakhs Rs per month for 20 years

Then what will be its present value?

We will understand that in this video. So please watch the video from the start till the end

Because at the last I will tell you how this calculation is done on MS Excel

Let's go straight towards the blackboard.

So let's understand the concept of the present value of the annuity

In the previous video, we saw

What is the present value of the single payment?

Single payment means assume

If your 1 lakh Rs is to come after 5 years

Let's say you will get 1 lakhs Rs from somewhere after 5 years

Then what will be its present value?

We saw the formula of the present value

Future value divided by

(1+R)^n

Where your future value will be 1 lakh Rs

You will write 100000 here

divided by (1+0.07)

0.07 is the discount rate.

We said R

This is a discount rate like your fixed interest rate

or risk-free interest. We consider it as a discount rate.

And with that this N, this is your number of periods

So in this formula, if we are talking about 5 years

Then N will be 5 here.

So in this way, we calculated the present value.

We calculated the present value of 100000

71299 Rs

And we also saw how can this be calculated in an excel sheet or google spreadsheet

In this video, we are talking about the present value of the annuity

Annuity means uniform payments at uniform intervals

Uniform means

If I talk about an example

Assume you have a source of

payment of 10000 Rs per month

And let's say it is for 3 years.

If we take an example then assume you get rent from somewhere

You have signed a lease for 3 years for example. Now you want to calculate

the present value of the amount. How will we calculate it?

Now we will see how to find that formula in an excel sheet

Before that, I will give you a simplified example of this

So that we will understand the meaning of this concept.

For example, we are on a zero date

Let's say we will get 10000 Rs after 1 year and 2 years

So I will get 10000 Rs in the first year

And I will get 10000 Rs in the second year also

Now how will we calculate its present value?

So what will happen in this case is

First, the present value of 10000 will be calculated. How much will it be?

10000/1.07

After that, the present value of this will be calculated.

And we will take it to zero dates. How will this be calculated?

(10000/1.07)^2

So I have done ^2

Just like we did 5 there

Here it is 2

So if we calculate its value then

Then it will be 9346.

And when we will calculate the value of this

Then it will be 8734

Now we will add both of these.

The value will be 18080 after the addition

So in this way, if you want to calculate for 3, 4, or 5 years

If you want to calculate for multiple years then the present value will come at a zero date

And you will add them. This is the concept of the annuity.

So this was quite a long method.

If you want to calculate it for 5, 20, or 15 years

Then it will be very complicated.

So for this, we should use Microsoft Excel

or Google spreadsheet. So we will see how the calculation is done.

We will see both concepts. If we do 10000 for 2 years

Then how will the present value be calculated in an excel sheet?

With that, if we talk about per month. For example, there is monthly compounding

You are getting paid per month

3 years, means 36 months

How will it be calculated? We will see the calculations in the excel sheet

Let's see how it is calculated in an excel sheet

Or you can also calculate in the Google spreadsheet

So see, in this case, the future value is zero

because we are not talking about a single payment

So what we are talking about is if you are getting 10000 per annum

I discussed this in the first example that

If you get the payment of 10000 in the first year and the second year.

We will assume the discount rate of 7%

We have talked about the discount rate earlier also.

Before the video of present value

The discount rate is

the risk-free rate of fixed deposit

So if you haven't watched my video on the present value

Then please watch that video because you shouldn't get confused about the discount rate

We are assuming the risk-free interest rate of FD

which is 7% on today's date. It can also vary.

Whatever the risk-free interest rate of FD is in the present times

You will take that as a discount rate here. There is a period of two years

Compounding is annual. We are considering it annually. Now if you calculate the

present value then you will put =pv

You will open the bracket. After that, you will enter the information that you are getting

See we are talking about the rate first. Firstly you will enter the rate here.

There is annual compounding here so you will select the cell as it is

There is an annual rate of 7%. You will put a comma and then space.

You will select 2 years as a period. We have selected the cell

You have to put a comma. The cell hasn't been selected properly.

We will put a comma and space again.

Now we have to enter the payment. Then you will put the sign of minus

You will select the payment

The payment is 10000 per month. After that, you will put comma and space

After that, your future value is zero in this case.

Because we are not getting a single lump-sum payment

We saw that in the previous video

If you have to calculate the present value of a single lump sum amount

Then we used future value at that time. So you can watch that video on how we used the formula.

So in this case, we will put zero, our future value is zero.

We will enter after closing the bracket.

See our value is 18080 Rs which we saw in the previous video

We saw it in this video also when we were calculating manually.

Then also the value was 18080 Rs. Now we will see

This is a simple calculation you can do it manually

Because it is just for 2 years.

Now assume you get the rent

of 10000 Rs per month

Or let's say you get a fixed dividend from any stock

So you want to calculate its present value.

You want to get its valuation then how will you do it?

In this case, the discount rate will be 7%

The time period is 3 years. Compounding will be done monthly in this case

Because you are getting 10000 Rs every month.

So you can invest these 10000 Rs somewhere because you are getting paid every month.

That's why compounding is considered monthly here.

Now we will see how the formula will be used in this case.

You will do "=pv" you will open the bracket

Because there is monthly compounding

Now we will select the rate and divide it by 12

After that, you will select the period.

Period means it is 3 years so you will need that in months

You will multiply it by 12. You will put a comma and then put space

Now we have to put the payment here. Monthly payment of 10000 is done here.

We will select this cell. Again we will type zero after putting comma and space

Because the future value is zero in this case also.

We will press enter. So the value will be 323865 Rs

If you get 10000 Rs every month for 3 years

So if I talk about its actual value or absolute value then

So see, 36×10000

So you will get a total of 3,60,000 Rs

Because you are getting that money within 3 years

Then the value is 3,60,000.

But if you have to take the lump sum amount from someone

Then you could have taken 3,23,865 Rs

This is what it means

So we have calculated the present value of the money that we are getting

within 3 years. We have calculated the valuation.

In the same way, companies' valuation is also calculated.

If you get any fixed income or if in any project you get fixed income

If you get fixed income in any investment

Then in this way, you can calculate its present value.

But what happens is that in most cases

We don't get the fixed payment

In that case, we have to calculate the net present value.

For example, we could face loss or profit in business

Your cash flows can be negative or positive.

So in that case, because we calculate the net present value

And we call it valuation.

So in the next video, we will talk about net present value.

This is a very important topic. So please watch our next video of net present value.

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