Question

1. The present value of a cash flow will never be less than the future dollar amount of the cash flow.

True

False

2) The present value of an amount to be received in five years is greater than the present value of the same amount to be received in ten years.

True

False

Answer 1

1) This statement is false

Present Value of cashflow will be always less than the future dollor amount of the cashflow, as we will discount the future cashflow with the required rate of return

e.g. $11000 receivable after 1 year, will have present value $10000 when discounted using 10% interest rate

2) This statement is true.

If the same amount is received in less number of years, means will discount the amount by lower discounting factor.

Lesser the term = lower the discounting factor, Higher the term = higher discounting factor.

amount received in five year will have comparatively lower discount factor than amount received in 10 year, as amount is received earlier.

Hence The present value of an amount to be received in five years is greater than the present value of the same amount to be received in ten years.

e.g. Present value at 10% required rate

$10000 received in 5 year = $10000 / (1.1)^5 = $6209

$10000 received in 10 year = $10000 / (1.1)^10 = $3855

formula = future value / ( 1 + r ) ^ n

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