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CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest

Mrs. Sharma will receive Rs 2,000 at the end of each year for 3 years. Using a discount rate of 10% p.a. (compound), the present value of the annuity is approximately (use 1.1^-1=0.9091, 1.1^-2=0.8264, 1.1^-3=0.7513)

The present value is about Rs 4,974. Each year-end receipt of Rs 2,000 is discounted at 10%, using factors 0.9091, 0.8264 and 0.7513 whose sum is 2.4868, so 2,000 multiplied by 2.4868 gives roughly Rs 4,974.

  1. ARs 6,000
  2. BRs 4,974Correct
  3. CRs 5,470
  4. DRs 4,000

Explanation

Sum of discount factors = 0.9091+0.8264+0.7513 = 2.4868. PV = 2,000 x 2.4868 = Rs 4,973.6, about Rs 4,974. Rs 6,000 is the undiscounted total, and Rs 5,470 wrongly treats it as an annuity due (4,974 x 1.1).

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