Question

what is the relationship present value and future value for a given rate of return and time shown in the following equation: PV=FV/(1+r)t

Answer 1

In this given equation, it is given that present value is equal to future value which have been discounted with the rate of return and time factor, so it is illustrating that as the rate of return will be increasing, then the present value is going to go lower, and when the rate of return is going to decrease, then it will mean that the present value is going to go higher.

When the time factor is considered, the earlier the future cash flows is to be received, the higher the present value would be,and if the future cash flows are receivables at later stages, then the present value would be lower due to time value of money concept.

This equation is illustrating that present value is the value of future cash flows which have been discounted at a certain rate of interest at the current point, so this is reflecting that, Everything remaining constant, when the future value would be higher , the present value will also be higher and when the future value would be lower everything remaining constant, present value would also be lower.

So this equation is stating that present value is current value of cash flows which are to be receivable in future after they have been discounted at a specific rate of interest, and this is reflecting the relationship which have been stated above.