PV on Annuity question question, receive, investor, problem, present

prav_Cfa7

#19 on Schweser Exam 1 morning session.

Q:An investor wants to receive $10,000 annually for ten years with the first payment 5 years from today. If the investor can earn 14% annual return, the amount she will have to invest today is closest to:
A. 27,091
B. 30,884
C. 52,161

A:This problem involves determining the present value of an annuity followed by finding the present value of a lump sum. Enter PMT = 10,000, N = 10, and I = 14. Compute PV = 52,161.16. That is the present value of the 10-year annuity, four years from today. Next, we need to discount that back to present for four years to find the amount of the investment today. Enter FV = −52,161.16, N = 4, I = 14, PMT = 0. Compute PV = 30,883.59.


My question is about drawing the timeline - Do you start at #0 or #1. "4 years from today" at 0 would bring you to year 4 and year 5 for starting at #1.

This really throws me off in getting the right answer - any tips on how to draw the timeline for this one?

btcapital

Hi. I did this morning session last night (and this problem, etc.).

The way to think about it is in 2 segments.

0 Yrs -------- 5 Yrs (Payments begin) --------------------------- 15 Yrs (Payments end).

I start with second segment and calculate the value of an annuity into my TI BA II Plus.

N=10 Yrs.
PV=0 (he will have no money left after the $10,000 payments end)
PMT = $10,000
INT = 14%
Solve for PV (how much money he needs at start when these payments begin).

Then I take that # and discount it back 5 years (1.14^5) to get the number for today.

How did you do on this practice exam?

lc26mizzou

OKay yea that makes sense, thanks! The wording in the answer confused me when it says "4 years from today" and "discount that back to present for 4 years" instead of 5.. still confusing but going your route makes sense.

I got a 61% =(. Frustrating b/c I've been scoring low 70's to low 80's on Q bank tests but blew this one and the CFA mock.

How'd you do?

Ionutzakis

I got 75.8% (raw score out of 120, not on a weighted basis). But this includes a 42.8% score (6 out of 18 correct) on the quant section, which I have not even studied yet. I was just giving it my best guess in that section. I will study the quant material this PM/tomorrow.

I got 80%+ on everything except ethics (72%) and derivatives (57%).

I'm worried that the Schweser material seems easier than the EOC material or what might be on the actual exam. Also, I was able to eliminate 1 answer and guess well on the remaining 2 options on several questions (which I marked to review the answer later). I would forget a formula, but still know enough to guess the right answer to a computation problem. Doesn't make me feel good, but I think I will be OK when exam comes.