Question

Give an example from the realistic life for each of the following conversion process: Anual to Further : Anual to Anual, Present to Anual

Answer 1

Assuming that the question is talking about Annual, future and present values of cashflows.

All 3 of these cashflows can be converted into one another, and often do get converted in real ilfe. As the question asks, lets see how they get converted in real life.

• Annual to future value- This is often done in monthly deposits (SIPs are an example). For example. an investment plan offers $60000 in return of $2000 per month for 24 months. $60000 is the future value of an annuity of $2000.
• Annual to Annual- This happens when the tenure of a payment changes. For example, currently you are paying an annual payment to your life insurer of $10000 (for both tax purposes and because you will get a final payment of $70000 after 5 years). But now you want to change it so that you get the same $70000 but in 4 years. So you increase the annual payment. This is an annual to annual change.
• Present to Annual- This is when are converting a fixed present amount to some annual values. Sometimes, especially in debt restructuring of huge loans, a big pending amount is allowed to be paid over equated annual payments. This is converting present value to annual amounts.