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 an 8% interest 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.Xxx) Present Value One year from now Two years from now Three years from now Four years from nowl 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 flowsan annuity because it is a stream of V cash payments made at v time intervals

Explanation / Answer

Requirement 1 :

Requirement 2:

The stream of cash flows is an annuity because it is a stream of equal cash payments made at equal time intervals.

Requirement 3:

The present value of an annuity of $ 1 received each year for five years at 8% per year is $ 3.993.

The sum of the present values in Requirement 1 equals the present value calculated with the Present Value of Ordinary Annuity of $ 1 table.

Requirement 4:

This exercise shows how Annuity PV factors are a sum of the PV factors found in the Present Value of $ 1 tables.

Present Value One year from noe 0.926 Two years from now 0.857 Three years from now 0.794 Four years from now 0.735 Five years from now 0.681 Total Present Value 3.993

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