Question

If the interest rate is 8%, what is the 4-year discount factor? What is the 4-year annuity factor? What is the relationship between these two numbers? Explain.

Answer 1

Answer:

Discount factor will be 0.735

And annuity factor will be 3.312

Explanation:

We have given rate of interest r = 8 %

Time period n = 4 year

We have to calculate discount factor

Discount factor is equal to $=\frac{1}{(1+r)^n}=\frac{1}{(1+0.08)^4}=\frac{1}{1.08^4}=0.735$

So discount factor will be equal to 0.735

Annuity factor is equal to $(1-\frac{\frac{1}{(1+r)^n}}{r})$

So annuity factor will be equal to $(1-\frac{\frac{1}{(1+r)^n}}{r})=(1-\frac{\frac{1}{(1+0.08)^4}}{0.08})=3.312$

So annuity factor will be 3.312

Annuity factor is determined for a progression of equivalent installment/receipt for indicated time frame.  

In any case, discounting factor  is determined distinctly for discover the present estimation of sum which will be put resources into year 4.