Question

Could you provide example explaining why it increases or decreases using Financial Calculator Keys? What happens to the PV of a set amount if the length of time shrinks, but the rate stays the same?

a) The PV increases

b)The PV decreases

c)The PV doesn’t change

d)The PV goes to infinity

Answer 1

Answer : a) The PV increases

Explanation :

Take an example :

Cash flow 100 in 3 years (Total 100*3=300) with 6% interest rate.

And then when length of time shrinks, then take Cash flow of 150 in each year(Year 1 & 2) (Total 150*2=300) with 6% interest rate.

So, using financial calculator PV function,

In first case, take : N(nper) = 3

rate = 6%

pmt = 100

By solving, PV = 267.30

In second case when time shrinks, take : N(nper) = 2

rate = 6%

pmt = 150

By solving, PV = 275.01

So, it can be seen that when time shrinks, PV increase.