Question

The present value of a stream of cash flows you expect to received will always increase when: a. the interest rate is greater than zero and the number of compounding periods decrease. b. the interest rate is zero and the number of compounding periods decrease. c. the interest rate is zero and the number of compounding periods increase. d. the interest rate is greater than zero and the number of compounding periods increase.

Answer 1

B) the interest rate is zero and the number of compounding periods decrease.

Step-by-step explanation:

When you are calculating the present value of a future cash flow if the discount rate (interest rate) is lower, the higher the present value. Also, if the number of periods is shorter, the present value will be higher.

Inversely, a higher discount rate or larger number of periods, the lower the present value.

Since the smallest possible discount rate is 0, then that would maximize the present value, along with shorter periods.