IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models
Cashflows of Rs 1,000 at time 1 and Rs 2,000 at time 2 (in years) are valued at an effective annual rate of 10%. What is the present value, to two decimal places?
The present value is Rs 2,561.98. Discount Rs 1,000 by one year at 10 per cent to get 909.09 and Rs 2,000 by two years to get 1,652.89, then add them together. Each payment must use its own time.
- ARs 2,561.98Correct
- BRs 2,727.27
- CRs 2,636.36
- DRs 2,500.00
- Rs 3,000.00
Explanation
PV = 1000/1.1 + 2000/1.21 = 909.09 + 1652.89 = 2561.98. Option 2,636.36 wrongly discounts both at 1.1 only, and 2,727.27 discounts the whole at one year... neither is correct. Dividing the sum by 1.1 gives 2,727.27, which wrongly treats both cashflows as at time 2.
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