Question

1. How does the future value, ordinary annuity, compounding periods and rate of return affect the discounted present value, respectively, if other things remain unchanged?

Answer 1

Present value of an ordinary annuity = ​​​​​​

Where, P = periodic payment, r=annual interest rate

n = compounding periods.

1. Future value - increase in future value will increase in discounted present value.

2. Ordinary annuity - if we shift from ordinary annuity to annuity due the discounted present value will increase since now one period is less discounted overall.

3. Compounding periods - increase in n (compounding periods) will increase the discounted present value.

4. Interest rate - increase in r (interest rate) will decrease the discounted present value.

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