Question

The interviewer asks regarding the net present value of $3,000 to be received in the future, what do you think would happen to the present value (PV) if the interest rose?

Answer 1

As the interest rate increases, present value of future amount decrease.

As in the question, suppose you are going to get $3,000 in the future. For the better understanding, assume you will get it after 1 year.

Let's see what happens to present value as the interest rate increases.

Formula of present value (PV)

PV = FV/(1 + r)ⁿ

For, i = 10%

PV = 3000/(1 + 0.1) = 3000/(1.1) = 2727.27

PV = $2727.27

For, i = 20%

PV = 3000/(1 + 0.2) = 3000/(1.2) = 2500

PV = $2500

For, i = 30%

PV = 3000/(1 + 0.3) = 3000/(1.3) = 2307.69

PV = $ 2307.69

Hence, we can clearly see from above example that as the interest rate is increasing present value is decreasing.