Which of the following statements is TRUE? A) The time line for a lender of $1,0

Question

Which of the following statements is TRUE?

A) The time line for a lender of $1,000 for one year at a rate of 8% compounded annually would include a positive cash flow of $1,080 at the end of year 1

B) The formula for the PV of an annuity would give us the value at the end of year 6 for an annuity with a full payment that occurs at the end of year 5

C) The compounding process subtracts the interest part from the PV

D) It is easier to compute the FV of perpetuity than the FV of an annuity

Please tell me why the other 3 answers are false

Explanation / Answer

Option A is correct

For lender in year0, 1000 is a negative cashflow .

In year1, he gets prinicpal of 1000 plus 80 as interest, so total = 1080

Option B is incorrect, PV would give value at below year 5 not at year 6

Option C is incorrect, because compounding includes principal and interest payment

Option D is incorrect, we cant find FV of perpetuity

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