Question

Consider a single cash flow of $220,000 to be paid in ten years and a ten-year annuity paying $20,000 annually for ten years. Suppose both the futurity of the single cash flow and maturity of the annuity are increased to eleven years. What happens to their respective preset values, assuming unchanged discount rates and yields?

Answer 1

The present value of the single cash flow does not change, but that of the annuity rises

Step-by-step explanation:

As the single cashflow of 220,000 is in present-day their PV will not change as already is in present-day dollars.

Regarding the annuity, as we add another installment (increasing from 10 to 11) of $20,000 the present value of the annuity as today increases. As it represents more cash in the future it will represent more cash in the present as well.