Use the Present Value of $1 table to determine the present value of $1 received

Question

Use the Present Value of $1 table to determine the present value of $1 received one year from now. Assume a 12% nterest rate. Use the same table to find the present value of $1 received two years from now. Continue this process for a total of five years. Round to three decimal places. (Click the icon to view Present Value of $1 table.) Read the requirements. Requirement 1. What is the total present value of the cash flows received over the five-year period? Calculate the total present value of $1 received each year. (Round to three decimal places, X.x00x) Present Value One year from now Two years from now Three years from now Four years from now Five years from now Total present value Requirement 2. Could you characterize this stream of cash flows as an annuity? Why or why not? The stream of cash flows | | an annuity because it is a stream of | cash payments made at 7 time intervals Requirement 3. Use the Present Value of Ordinary Annuity of $1 table to determine the present value of the same stream of de cash flows. Compare your results to your answer to Requirement 1. (Round to three decimal places, X.X00x) Enter any number in the edit fields and then continue to the next question. MacBook Pro F12 DlI F8 F11 F10 F9 F7 delete

Explanation / Answer

requirement 1 :

requirement 2:

the stream of cash flows can characterise as an annuity because it is a stream of same cash payments made at same time intervals..

requirement 3 :

the present value of an annuity of $1 received each yearfor five years , at 12% per year in $ = $ 1* pvaf (12%, 5yrs)

= 1*3.605

= $ 3.605

the sum of present value in requiremnet 1 is same as present value calculated with the present value of ordinary annuity of $1 table.

requirement 4 :

this exercise shows how annuity pv factors is the sum of the pv factors found in the present value of $ 1 table.

pvf@12 % present value one year from now ($1) .893 .893 two years from now .797 .797 three years from now .712 .712 four years from now .636 .636 five years from now .567 .567 total present value $ 3.605

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