Question

1. (T/F) The higher the discount rate or interest rate the lower my PV (Present Value)
2. (T/F) The further out I receive a FV, the higher the PV
3. (T/F) The more time I have to invest the lower my FV (future value)
4. (T/F) The higher the interest rate the higher the FV
5. (T/F) The more money I invest the higher FV

6. What is the FV of $50,000 invested today in 9 years if I can earn 5%?

7. What is the FV of $10,000 in 5 years at a 7% rate or return?

8. What is the PV of $40,000 received in 5 years if the rate or return or discount rate is 6%?

9. How much would I pay for a lump sum of $15,000 in 3 years if my required return is 10%?

Answer 1

Let Present Value be PV

Future Value = FV

Number of Years = n

Interest Rate = r

FV = PV(1+r)ⁿ

PV = FV/(1+r)ⁿ

=> Higher the discount rate, lower the PV ... statement 1 is True

As n increases, PV decreases ... statement 2 is False

As n increases, FV increases ... statement 3 is False

As r increases, FV increases .... statement 4 is True

More the PV, higher is the FV .... statement 5 is True

PV = 50000, n = 9 years, r = 5% => FV = 50000(1+0.05)⁹ = $77566.41

PV = 10000, n = 5 years, r = 7% => FV = 10000(1+0.07)⁵ = $14025.52

FV = 40000, n = 5 years, r = 6% => PV = 40000/(1+0.06)⁵ = $29890.33

FV = 15000, n = 3 years, r = 10% => PV = 15000/(1+0.10)³ = $11269.72