Answer the following statements true (T) or false (F)
1. The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.
2. The following formula is used to compute the present value of a lump sum:
Future value = Present value × PV factor for i = X%, n = X periods
3. The process for calculating present values is often called discounting future cash flows because future amounts are discounted to their present value.
4. An annuity is a series of unequal payments over equal intervals.
5. An investment today of $8,424 at 6% will yield payments of $2,000 per year for five years, or total payments of $10,000 over five years. The reason for this increase is that the interest is being earned on principal that is left invested each year.
1. TRUE
2. FALSE
Explanation: Present value = Future value × PV factor for i = X%, n =X
3. TRUE
4. FALSE
Explanation: An annuity is a series of equal payments over equal intervals.
5. TRUE
Explanation: PV = Payment × PVA factor (i = 6%, n = 5)
= $2,000 × 4.212
= $8,424
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