IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Present value and accumulated value of cashflow streams
A payment of Rs 50,000 is due in 4 years. At an effective annual interest rate of 8%, what is its present value, to the nearest rupee?
The present value is about Rs 36,751. Divide Rs 50,000 by 1.08 raised to the fourth power, which is 1.36049. Simple-interest discounting gives a wrong answer because the question specifies an effective annual rate with compounding.
- ARs 36,751Correct
- BRs 34,000
- CRs 37,860
- DRs 38,000
- Rs 36,251
Explanation
PV = 50,000 x 1.08^-4. 1.08^4 = 1.36049, so PV = 50,000/1.36049 = 36,751. Rs 34,000 comes from simple discounting (50,000 less 4 x 8% of 50,000). Rs 37,860 comes from discounting over 3 years.
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