To think critically about: The relationship between the value of an
Introduction:
The total sum of interest that is due for a particular time is the interest rate. The rate of interest can be due for a period as a proportion of the sum borrowed or deposited and as the proportion of the sum lent. The future sum of money that is worth today is described by the present value. The present value of the cash flows in the future with a particular discount rate is the present value of annuity.
Explanation of Solution
The relationship between the interest rate and the
- If the interest rate maximizes, the present value of the annuity would decrease and the present value of annuity would increase if the interest rate decreases.
- If the rate of interest increases, the
future value of the annuity would increase and the future value of annuity would decrease if the interest rate decreases.
To calculate: The present value of
Introduction:
The total sum of interest that is due for a particular time is the interest rate. The rate of interest can be due for a period as a proportion of the sum borrowed or deposited and as the proportion of the sum lent. The future sum of money that is worth today is described by the present value. The present value of the cash flows in the future with a particular discount rate is the present value of annuity.
Answer:
- The present value of annuity with an interest rate of 10% is $44,855.34.
- The present value of annuity with an interest rate of 5% is $56,368.66.
- The present value of annuity with an interest rate of 15% is $36,637.01.
Answer to Problem 38QP
- The present value of
annuity with an interest rate of 10% is $44,855.34. - The present value of annuity with an interest rate of 5% is $56,368.66.
- The present value of annuity with an interest rate of 15% is $36,637.01.
Explanation of Solution
Given information:
Person X purchased a ten-year
Time line:
Formula to calculate the present value of annuity:
Note: C denotes the annual cash flow, r denotes the rate of exchange, and t denotes the period.
Compute the present value of annuity at 10% interest:
Hence, the present value of annuity at 10% is $44,855.34.
Compute the present value of annuity at 5% interest:
Hence, the present value of annuity at 5% is $56,368.66.
Compute the present value of annuity at 15% interest:
Hence, the present value of annuity at 15% is $36,637.01097.
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Chapter 5 Solutions
Loose Leaf for Essentials of Corporate Finance
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