Question

ch 3 How useful is the calculation of present value, future value and interest rate to select the best investment alternative?

Answer 1

Present value is the current value of all the future cashflows that the entity would earn if it invests in the new project. Interest rate is the appropriate discount rate that is used to discount all the future cashflows.

Interest rate, present value & future value are considered as the best for the evaluation of the investment decisions that whether such investment needs to be made or not. As an investment in any project involves huge cost a company needs to evaluate whether such project should be taken up or not and for such evaluation company usually uses the NPV/DCF method where it computes the net benefits that would accrue to the company in case the company opts for this project.

Therefore, it is very useful.