Question

Consider the following cash flow diagrams. In these diagrams the present value (P) and the future value (F) are economically equivalent to the uniform series of payments (A) at a discount rate of 8% per period. Is the value of P larger than F, equal to F, or less than F? P is larger than F P equals F P is less than QUESTION 2 For the same cashflows considered in question 1, if the discount rate changed from 8% to 12% and the payment value remained the same, will the value of P that is economically equivalent to the uniform series (A) increase, decrease, or remain the same? Increase Decrease Remain the same QUESTION 3 For the same cashflous considered in question 1 . if the discount rate changed from 8% to 5% and the payment value remained the same, will the value of F that is economically equivalent to the uniform series (A) increase, decrease, or remain the same? Increase Decrease Remain the same

Answer 1

Question 1) In this question with an interest rate of 8% per period , P is less than F. This is so because P is the present value of all the uniform payments that will be made, in which the payments will be discounted by the rate given. F is the accumulated value of all the uniform payments made in the given periods. In this the payments are accumulated according to the interest rate, so the value of F will be greater than the value of P.

Question 2) As the rate of interest increases from 8% per period to 12% per period, the value of P that is equivalent to the uniform series of payments will decrease. This is so because now the future payments will be discounted by a larger interest rate , which means that the present value of each payment will be much lesser with the discount rate of 12% than the discount rate of 8%.

Question 3)  As the rate of interest decreases from 8% per period to 5% per period, the value of F that is equivalent to the uniform series of payments will decrease. This is so because now the uniform  payments will be accumulating at a lesser interest rate , which means that the future value of each payment will be much lesser with the interest rate of 5% than the discount rate of 8%.