Question

Which of the following is not true?

A.) Compound interest will be higher than simple interest assuming that there will be more than one period of investment.

B.) The Present Value refers to how much cash inflows that will be received in future will be worth as of today.

C.) Generally, as t (that is, the number of time period) increases, the Future Value will decrease assuming the r (the rate in which the interest will compound) is greater than zero.

Answer 1

a.Compound interest is interest earned on principal and interest of previous years ie it also computes 'interest on interest' unlike simple interest where interest is earned only on the principal balance.

For one period;Compound interest=Simple interest

However for more than one period;Compound interest is greater than simple interest.

b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

c.We use the formula:  
A=P(1+r/100)^t
where   
A=future value
P=present value  
r=rate of interest
t=time period.

Hence as t increases;FV will increase assuming the r is greater than zero.

Hence the correct option is:

C.) Generally, as t (that is, the number of time period) increases, the Future Value will decrease assuming the r (the rate in which the interest will compound) is greater than zero.