Question

What is the present value of $25,000 to be received in 15 years at an (a) 6.2% interest rate and, (b) 9.6% interest rate? Explain why the present value is lower when the interest rate is higher.

Answer 1

With a higher interest rate, you get more money per period, that acuminates.

The Present value is the starting amount... If the final amount is the same in both scenarios, and you get more interest in the second situation, you can start with a lower amount

Explanation:

`PV = CF / (1 + r) t`

pv1 = 25000/(1.062)^15 = $10,140.80

pv2 = 25000/(1.096)^15 = $6,320.94