Multiple Choice
Given a present value of \$1,000, an annual interest rate of 6\% compounded annually, and a time period of 3 years, what is the future value (FV) using the time value of money equation?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
The discount rate is the interest factor used to find the _____ of a future cash flow.
A
annuity value
B
compound interest
C
present value
D
future value
Verified step by step guidance1
Understand the concept of 'discount rate': The discount rate is the interest rate used to determine the present value of future cash flows. It reflects the time value of money, which means money today is worth more than the same amount in the future due to its earning potential.
Identify the relationship between the discount rate and present value: The discount rate is applied to future cash flows to calculate their present value. This process involves discounting the future cash flows back to their value today.
Recall the formula for present value: The present value (PV) of a future cash flow can be calculated using the formula: PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods.
Analyze the options provided: The term 'present value' aligns with the concept of discounting future cash flows to their current worth. Other options like 'annuity value,' 'compound interest,' and 'future value' do not directly relate to the discount rate's purpose in this context.
Conclude that the correct answer is 'present value': The discount rate is specifically used to find the present value of a future cash flow, as it adjusts the future amount to reflect its value in today's terms.
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