As you increase the number of periods (t), what happens to the future value of a...

As you increase the number of periods (t), what happens to the future value of a single cash flow? What happens to the present value? Assume that the interest rate (r) remains constant.

As you increase the interest rate (r), what happens to the future value of a single cash flow. What happens to the present value? Assume that the number of periods (t) remains constant.

Explain your reasoning.

Solutions

Expert Solution

1. When you are increasing the number of periods, the future value of a single cash flow will be INCREASING because when there will be a higher number of period then there will be more effect of compounding involved in it.

When there will be a increase in the time period, the present value of sum will be DECREASING because there will be a higher discounting effect due to larger time period.

2. When we are increasing the interest rate then also so the future value of the single cash flow will be INCREASING because there will be a higher compounding effect and there will be higher interest and the overall future value will increase.

When we are increasing the interest rate then also the present value of future cash flow will be DECREASING due to higher discounting effect as higher rate of discounting will mean lower present value.

jeff jeffy answered 2 years ago

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