Question

13. Choose the Choose the option that correctly ranks the following investments from highest present value to lo All options have the same interest rate. ent value to lowest present value. 1. A perpetuity with an annual cash flow of $100. II. An annuity due with 10 annual payments of $100. III. An ordinary annuity with 10 annual payments of $100. A. B. C. D. E. II, I, III I, II, III I, III, 11 III, II, 1

Answer 1

Answer- C. I, II, III

Explanation-

Perpetuity is a security that pays for an infinite amount of time. Present value of perpetuity = Amount/Interest rate.

A perpetuity has the highest present value as compared to any other annuities.

Further Annuity due is an annuity whose payment is due immediately at the beginning of each period. Since the first payment becomes due immediately it is itself at the present value. But in annuity regular or ordinary annuity , the payments are made at the end of the period .This is the reason that the present value of annuity due is more than present value of ordinary annuity.

Hence, from the above explanation it becomes clear that among the above the highest present value is of perpetuity thereafter annuity due and at last Annuity regular or ordinary annuity.