Person A expects to earn a $5,000 lump sum payment in a period of five years. If
Question:
Person A expects to earn a $5,000 lump sum payment in a period of five years. If the discount rate is 8.25%, this person will want to know what that payment will be worth today. They would need to calculate PV = $5000/ (1.0825)5 = 3,363.80.
An Example of Future Value (FV) of Lump Sum:
An investment of $1,000 is held for five years in a savings account. This account has 10% simple interest paid yearly. In this scenario, Future Value of the original $1,000 interest is $1,000 [1 + (0.10 x 5)], or $1,500.
An Example of PV of annuity
A person has the option to receive an ordinary annuity that pays $50,000 per year for 25 years, with a 6% discount rate. OR take a $650,000 lump-sum payment. Which is the better option? The annuity is $10,832 less for a time-adjusted basis. The person in this scenario comes out ahead by choosing the lump-sum payment rather than the annuity.
An example of Future (FV) of annuity
A person decides to invest $125,000 annually for the next five years in an annuity they expect to compound at 8% yearly. The expected future value of this payment is...
