Which of the following is the most useful method to deal with the situation when

Question

Which of the following is the most useful method to deal with the situation when the payment and compounding periods are not the same and the cash flow is irregular?

a) Convert the non-standard cash flow into standard by finding an equivalent standard annuity for the existing compounding period

b) Convert the non-standard cash flow into standard form by changing the compounding period

c) Consider each payment in the non-standard cash flow separately

d) None of the above methods is useful

e) All of the above methods are equally useful

a) Convert the non-standard cash flow into standard by finding an equivalent standard annuity for the existing compounding period

b) Convert the non-standard cash flow into standard form by changing the compounding period

c) Consider each payment in the non-standard cash flow separately

d) None of the above methods is useful

e) All of the above methods are equally useful

Explanation / Answer

Option E

All these methods are useful depending on the presence of gradient. When this is the case and the gradient is not large, individual or separate treatment is necessary for each gradient. Also when there is no gradient, method a) can be used.

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