CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
A lessee will make 5 annual payments of 3,000, with the first payment due today (an annuity due). The discount rate is 6% per year. The present value of the payments is closest to:
The present value is about 13,395. First compute the ordinary annuity present value of roughly 12,637 using a 6% rate over 5 years, then multiply by 1.06 because every payment arrives one period earlier under an annuity due.
- A12,637
- B13,395Correct
- C16,911
Explanation
The ordinary annuity factor is (1 - 1.06^-5)/0.06 = 4.2124, so the ordinary annuity PV is 12,637. An annuity due is worth (1.06) times as much: 12,637 x 1.06 = 13,395. The 12,637 option ignores the timing of the first payment, and 16,911 is the future value of the ordinary annuity.
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