Question

Explain how the present value and future value of an annuity is determined. Please give example. At least 250 words. 

Answer 1

Present value of an annuity will be the present value of the future cash flows at regular intervals in fixed amounts and they will be discounted at the present value in order to arrive at the present value of cash flows and they will be discounted at the present in order to compare them with the initial investment and arrive at whether the investment is profitable for the company or not.

Future value of an annuity will be future value of all the cash payments which are made at the regular intervals in the future and we will be trying to compound it at a future time period and we will find out the future value of any given annuity cash flows

Present value of cash flows= (sum of stream of cash flows)/(1+Interest)

Future value of cash= principal (1+interest)^n

Present value and future value will be helpful in order to determine and arrive at various decision making process for the company and they will be trying to help in acceptance and the rejections of various projects.

Present value will be helpful to make capital budgeting decisions and future value will be helpful in making various investment related decisions and they both are are including the important factor of the time value of the money and they will be assisting in better decision making.

For example of present value,there will be various mutually exclusive projects and acceptance of one products after determination of the cash flows discounted at the present value

for example of future value the systematic investment plan which are made by individual.