Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Question

Kai Ingram

Business

7 April, 03:39

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

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Answers (1)

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Natalia Newton · Answer 1

The correct answer is letter "B": Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Explanation:

Present Value informs us how much a future sum of money today is worth, given a defined return rate. This is an important financial concept based on the principle that the money received in the future is not worth as much as today's equivalent amount.

For instance, three years from now, $5,000 received is not worth as much as $5,000 received today. If you are investing the $5,000 now, it will be worth more than the original amount assuming a calculated rate of return in two years. Waiting for two years to invest the money is a two-year loss of interest, making the future money worth less than the $5,000 now.