Present and Future Value Equivalence and the Additivity Principle

Question 1

PV and FV Equivalence concept states that…

Answer 1

The PV of the initial investment is exactly equivalent to the annuity

Question 2

The PV, FV, and a series of cash flows can all be considered equivalent as long as…

Answer 2

They are indexed at the same point in time.

Question 3

If we place a lump sum in an account that earns the stated interest rate for all periods…

Answer 3

We can generate an annuity that is equivalent to the lump sum.

Question 4

We can calculate the size of the annuity payments knowing the lump sum with the following formula:

Answer 4

A=(PV/(1-(1/(1+R)^n))/r

Question 5

Cash flow additivity principle is…

Answer 5

The principle that dollar amounts indexed at the same point in time are additive.

Example
A t=0, t=1 = 100, t=2 = 100
B t=0, t=1 = 200, t=2 = 200
Equals to:
A+B t=0, t=1 = 300, t=2 = 300.