You have just won a $25 million lottery prize, which pays you $1 million (tax-free) every year for the next 25 years. Have you really won $25 million? What have you won if the rate of discount is 5%? You will get your first $1 million payment today and your last $1 million payment 24 years from now.
The present value of incomes that are realized in the future equals the discounted value of that income. The discount rate equals the market interest rate, which is expected to capture the time value of money.
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fromChapter 8 / Lesson 3
Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.