1. Find Present value factor for Interest rate i = 10%, Compounded (n) = 3, using Annuity Due method
Solution:
`i=10%=0.1` per year (Interest rate)
`n=3` years (Number of periods)
Present value factor of Annuity Due
`PVF=[(1-(1+i)^-n)/(i)]*(1+i)`
`=[(1-(1+0.1)^-3)/(0.1)]*(1+0.1)`
`=[(1-(1.1)^-3)/(0.1)]*(1.1)`
`=[(1-0.7513)/(0.1)]*(1.1)`
`=[(0.2487)/(0.1)]*(1.1)`
`=(2.4869)*(1.1)`
`=2.7355`
2. Find Present value factor for Interest rate i = 5%, Compounded (n) = 5, using Annuity Due method
Solution:
`i=5%=0.05` per year (Interest rate)
`n=5` years (Number of periods)
Present value factor of Annuity Due
`PVF=[(1-(1+i)^-n)/(i)]*(1+i)`
`=[(1-(1+0.05)^-5)/(0.05)]*(1+0.05)`
`=[(1-(1.05)^-5)/(0.05)]*(1.05)`
`=[(1-0.7835)/(0.05)]*(1.05)`
`=[(0.2165)/(0.05)]*(1.05)`
`=(4.3295)*(1.05)`
`=4.546`
This material is intended as a summary. Use your textbook for detail explanation.
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