Question

Consider the equation for present value. if you wished to increase the present value of a future amount by changing only one variable, which of the following actions should you take?

a. increase the time period
b. decrease the future value
c. decrease the interest rate
d. this statement cannot be answered with the information provided

Answer 1

C

Step-by-step explanation:

The formula for calculating present value

= FV x (1 + r)^-n

FV = Future value

P = Present value

R = interest rate

N = number of years

To answer this question, let me illustrate with some examples

Scenario 1 :

FV = $100 r = 5% n = 1 PV = $95.24

Scenario 2 : increase the time period

FV = $100 r = 5% n = 2 PV = $90.70

Scenario 3 : decrease the interest rate

FV = $100 r = 4% n = 1 PV = $96.15

Scenario 4 : decrease the future value

FV = $90 r = 5% n = 1 PV = $85.71

We can see that it is in scenario 3 that the present value increased