Question

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow?

Answer 1

If a payment of $10,000 is scheduled to receive in one year. In such situation, the present value of this cash flow will decrease, if there is any increase in the interest rate.

This happens due the interest effect of the sum which is going to be receive in future. The present value will decrease with the increase in the interest rate and similarly the present value will increase with the decrease in the interest rates.

For Example if in the given case, the Interest rate is 10% then present value will be : $ 10,000 / (1.10)= $ 9,090.90. While if the interest rate is 12% then the present value will be : $ 10,000 /(1.12) = $ 8,928.57