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:

Restriction of Productivity

Limitations or constraints that decrease the efficiency or output of a process, system, or individual's work.

Piece Rate Pay

A compensation system where employees are paid based on the amount of work they complete rather than the hours worked.

Hourly Wage

Compensation paid to an employee based on the number of hours worked.

Variable Pay

A portion of employees’ pay that is based on a measure of performance.