This Problem Demonstrates the Dependence of the Present Value of an Annuity

question 109

Essay

This problem demonstrates the dependence of the present value of an annuity on the discount rate. For an ordinary annuity consisting of 20 annual payments of $1,000, calculate the present value using an annually compounded discount rate of:
a) 5% b) 10% c) 11% d) 15%
Observe that the present value decreases as you increase the discount rate. However, the present value decreases proportionately less than the increase in the discount rate.

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Definitions:

Somatic Nervous System

A part of the peripheral nervous system responsible for carrying motor and sensory information both to and from the central nervous system.

Peripheral Nervous System

A portion of the nervous system that consists of the nerves outside the brain and spinal cord, connecting the central nervous system to limbs and organs.

Autonomic Nervous System

The part of the nervous system responsible for control of bodily functions not consciously directed, such as breathing, the heartbeat, and digestive processes.

Sensory Neurons

Nerve cells responsible for converting external stimuli from the organism's environment into internal electrical impulses.