Present value

Finding a present value is the reverse of finding a future value.

Which of the following is true about finding the present value of cash flows?

Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return.

Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.

Which of the following investments that pay will $14,500 in 12 years will have a lower price today?

The security that earns an interest rate of 4.00%.

The security that earns an interest rate of 6.00%.

Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 13.80%. Assuming that both investments have equal risk and Erics investment time horizon is flexible, which of the following investment options will exhibit the lower price?

An investment that matures in ten years

An investment that matures in nine years

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.

Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.