what is the relationship between the present value factor and the annuity present value factor

Expert Solution

Answer:

Relationship between the Present Value Factor and the Annuity Present Value Factor:

Present value factor is discounting factor for one year which is used to calculate the present value while Annuity present value factor is sum of all the present value factors for all the years till maturity.

Present value factor and Annuity present value factor is highly related because annuity present value factor depends on individual present value factors.

To understand more lets take an example:

Suppose cashflows are for 5 years and discounting rate is 10%. Then present value factor for 5 years is as follows :

Year 1 : 0.909

Year 2 : 0.826

Year 3 : 0.751

Year 4 : 0.683

Year 5 : 0.621

Now if add all these present value factors then its gets converted into Annuity Present Value Factor.

Annuity Present Value Factor = 0.909+0.826+0.751+0.683+0.621 = 3.79

Therefore present value factors and Annuity present value factor are highly related to each other.

jeff jeffy answered 1 year ago

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