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Flashcards Chapter 6

O

OmoT

Member
Hi
I don't understand why there is an additional term of 1/(1.04) , in this question with an annuity in arrears.
Shouldn't the solution just be ax @ 0%
Please could someone explain.
See first image and then the question
upload_2017-9-21_11-26-43.png
upload_2017-9-21_11-24-22.png
 
The first payment is 5,000 in one year's time. PV = 5,000/1.04
The second payment is 5,000*1.04 in 2 years' time. PV = 5,000/1.04
The 3rd payment is 5,000*1.04^2 in 3 years' time. PV = 5,000/1.04
Every payment has a PV = 5,000/1.04.
We get each payment if we survive a whole year. So EPV = 5,000e65/1.04

Good luck!
John
 
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