Rank the following from highest present value to lowest present value. Assume all else equal.v An annuity with 10 paymentsv An annuity due with 15 paymentsv A perpetuityv An annuity with 15 payments

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Rank the following from highest present value to lowest present value. Assume all else equal. v An annuity with 10 payments An annuity due with 15 payments A perpetuity v An annuity with 15 payments

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 10QTD

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Question

Rank the following from highest present value to lowest present value. Assume all else equal.
v An annuity with 10 payments
v An annuity due with 15 payments
v A perpetuity
v An annuity with 15 payments

Expert Solution

Step 1

Present value of annuity is the current value of the future payments that are calculated using the interest rate or discount rate , the future cash flow is discounted to find the present value.

The formula of which is:

Present Value of periodic payment= P* (1- (1+r)^-n)/r

Where,

P= periodic payments

r= rate of interest

n= number of period

And

Present Value of a single cash flow= Future Value / (1 + interest rate%)^n

Where,

n= number of period

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