Question

How does the future value, ordinary annuity, compounding periods and rate of return affect the discounted...

  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?

Homework Answers

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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