Annuity
In one sentenceA series of equal payments paid or received at regular intervals for a set period, such as financing installments and monthly rents.
Simply put
Despite its name, it does not have to be annual: monthly installments are a regular payment too. What matters is that the payments are equal and regular.
Its present value is calculated by discounting each payment separately and adding them up, or with a shortcut formula that gives the same result. This is how financing installments are calculated and lease offers compared.
Worked example
A tenant will pay warehouse rent of 10,000 SAR at the end of each year for 3 years, and the discount rate is 10%. What is the present value of these payments?
First payment10,000 ÷ 1.1 = 9,090.91 SAR
Second payment10,000 ÷ 1.21 = 8,264.46 SAR
Third payment10,000 ÷ 1.331 = 7,513.15 SAR
Present value of the payments24,868.52 SAR
Formula: Payment × [1 − (1 + rate)^−number of periods] ÷ rate