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Budgeting & Forecasting › Capital Budgeting

What is an annuity and how does an annuity factor simplify appraisal?

Intermediate

Answer

An annuity is a series of equal cash flows over consecutive periods. An annuity factor (cumulative discount factor) lets you value them in one step: PV = annual cash flow x annuity factor. It simplifies NPV where cash flows are constant, avoiding discounting each year separately.
PV of 10,000/yr for 5 yrs at 10% = 10,000 x 3.791 = 37,910.
Real-world example Constant annual savings are valued instantly using the annuity factor rather than year by year.

Common follow-ups: When can you use an annuity factor? | What does it multiply?

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All 34 Capital Budgeting questions