Question

True or False: The sum of the present value discount factors for 1...n years equals the present value factor for an annuity at year n.

Answer #1

True,

The sum of the present value discount factors for 1...n years equals the present value factor for an annuity at year n.

We know that PV = C_{1}/(1+r)^{n} where
C_{1} is cash flow at year end, when we sum the PV factor
of each period that is 1,2,3..n, the resultant is nothing but the
present value for an annuity at year n.

which can alternatively be calculated as Annutiy PV factor
=1-(1+r)^{-}^{n}/ r

For example i want to calculate the present value of series of payments of $1000 for 3 years based on 6% rate,

PV for year 1 = (1/1.06)^{3}= 0.9434, similarly for year
2 =0.8900,year 3 = 0.8396.

The present value of an annuity at year 3 = 2.6730, which is again a total of the above values

1) Money or funds can be thought of as a commodity, like any
other commodity that can be bought or sold. T or F
2) The sum of the present value discount factors for 1...n years
equals the present value factor for an annuity at year
n.

1. The future value of a present sum increases as either the
discount rate or the number of periods per year increases, other
things held constant.
True or False
2.It is always desirable to have a higher compounding frequency,
regardless of the initial investment or the time horizon.
True or False
3.A perpetuity is a level stream of evenly spaced cash flows
that never ends.
True or False

1(a). (TRUE or FALSE?) Financial managers should not rely on the
net present value method as a primary decision method.
1(b). (TRUE or FALSE?) If the value of one currency decreases
relative to the value of another currency, the currency with the
falling value is said to be strengthening.
1(c). (TRUE or FALSE?) Perpetuities contain an infinite number
of annuity payments.

The present value of K due in 2 years is 678.80. If the force of
discount (same as force of interest ) is cut by a factor of 1/4,
that present value would be 766.30. What would the present value be
if the rate of discount d is cut by a factor of 1/5?

For any discount rate, the future value of an ordinary annuity
factor for n periods is equal to the future value of an annuity due
factor for n minus 1 periods plus 1.

True or False
1. Suppose you are given a positive discount (or
interest/compound) rate. If you calculated the PV (present value)
of a series of equal cash flows, it will always exceed the FV
(future value) of the same series of cash flows.
2. All else equal, the PV (present value) of an annual ordinary
annuity (i.e cash flows only happen at end of each year) increases
as the frequency of compounding (# of periods per year)
increases.
3. It...

true or false:
to calculate the interest earned from an annuity, you subtract
the sum of all the payments from the future value of the
annuity?

1 . An employee retiring from a firm after 36 years of service
at age 68 has earned a pension of $63,000 per year paid in
quarterly payments of $15,750. His expected life expectancy is 12
years further at age 80. The pension payments would end when he
dies.
a. Given a 16% discount rate based on the investment risk of his
employer, what is the lump sum value of the pension when he
retires? Excerpts from the Present Value...

How does the present value of a lump sum compare to the present
value of an annuity?

What is the present value of a five-year $20,000 ordinary
annuity plus of a lump sum of $110,000 at the end of year 5.
Discount rate of 12%
Can you teach me how to do this on excel?

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