Compare present value (PVA) and future values of annuities (FVA). How does their

Question

Compare present value (PVA) and future values of annuities (FVA). How does their value compare if payments are in advance or arrears?

PVA and FVA both always have a higher value if payments are in advance, all other factors equal.

PVA has higher value with payments in advance, while FVA has higher value with payments in arrears, all other factors equal.

PVA has lower value with payments in advance, while FVA has lower value with payments in arrears, all other factors equal.

Both always have a higher value with payments in arrears.

PVA and FVA both always have a higher value if payments are in advance, all other factors equal.

PVA has higher value with payments in advance, while FVA has higher value with payments in arrears, all other factors equal.

PVA has lower value with payments in advance, while FVA has lower value with payments in arrears, all other factors equal.

Both always have a higher value with payments in arrears.

Explanation / Answer

a. PVA and FVA both always have a higher value if payments are in advance, all other factors equal

PVA discounts cashflows to present value and so advance payment implies that the present value of cashflow would be higher for payment with lower discounting period (or advance payment in this case). Also FVA compounds the value of the cashflow and so advance payment implies the compounding period is more and hence higher value of FVA.

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