When regular payments of amount R are made at the conclusion of each year for ‘n’ years, the net present value of this annuity at an interest rate i is expressed as _________________?
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Answer: B. R [{(1 + i)n – 1}/ i (1 + i)n]
Explanation
An ordinary annuity involves a uniform series of payments made at regular time intervals. The net present value formula sums the discounted cash flows of each individual periodic payment. Algebraic simplification of the geometric series yields the standard present value annuity factor. Annuity formulas are essential tools in engineering economics for evaluating loan payments and savings. Present value of an annuity determines the lump sum needed today to fund future periodic withdrawals. Compound interest rates determine how strongly future annuity payments are discounted to the present.
Industrial planners use annuity equations to calculate mortgage payments and equipment leasing costs. Evaluating loan amortization schedules requires precise application of ordinary annuity mathematics. Financial analysts assess long-term project cash flows using standardized annuity present value formulas. Option A calculates the future value of an annuity rather than its net present value. Option C calculates future compound growth of a single lump sum rather than an annuity. Option D discounts a single future payment rather than a uniform series of annual payments.
- Subject
- Engineering
- Category
- Chemical Engineering
- Topic
- —
- Difficulty
- medium
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