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18 January, 20:04

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow

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  1. 18 January, 23:45
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    The present value of this cash flow will be decreased following the increase in the interest rate.

    Explanation:

    We have the formula for calculating present value is:

    PV = FV / (1+r) ^n

    where:

    PV is the present value

    FV is the future value which is $10,000 in the described question

    r is the discount rate which is the interest rate

    n is the number of discounting periods which is one year in the described question

    So, once the interest rate increase, the denominator - (1+r) ^n - will increase. Then, if FV remains constant, PV will decrease.

    So, The present value of this cash flow will be decreased following the increase in the interest rate.
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