Question

1. (TRUE or FALSE?) Computing the present value involves compounding present cash flows forward to the future at an appropriate discount rate.

2. (TRUE or FALSE?) The future value factor for 10 years at 15% with annual compounding is calculated as (1 + 0.15)^10.

3. (TRUE or FALSE?) With simple interest, the interest earned each period is paid only on the interest earnings from the previous periods.

Answer 1

1. False

Future Value(FV) = [Present Value (PV)] *(1+rate )^no . of years (n)

or PV = FV/(1+ rate )^n

False. As computing, the present value involves compounding future cash flows back to the present at an appropriate discount rate.

2. True

Future Value(FV) = [Present Value (PV)] *(1+rate )^no . of years (n)

(1+rate )^no . of years (n) ----> Future Value factor

So future value factor is (1 + 0.15)^10

3. False

With simple interest, the interest earned each period is paid based on the principal and interest rate for that period

Interest = Principal * Interest Rate * Time