Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

How does an increase in the interest rate affect the present value of a future cash flow?

The present value first increases and then decreases as the interest rate increases.

The present value remains unchanged regardless of the interest rate.

The present value increases as the interest rate increases.

The present value decreases as the interest rate increases.

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Verified step by step guidance

Understand the concept of present value: Present value (PV) is the current worth of a future cash flow, discounted at a specific interest rate. It reflects the time value of money, where money today is worth more than the same amount in the future due to earning potential.

Recall the formula for present value: PV = \( \frac{FV}{(1 + r)^n} \), where FV is the future value, r is the interest rate, and n is the number of periods. This formula shows how future cash flows are discounted back to their present value.

Analyze the relationship between interest rate and present value: As the interest rate (r) increases, the denominator \((1 + r)^n\) becomes larger, which reduces the present value (PV). This is because higher interest rates imply a greater discounting effect.

Consider the implications: The present value decreases as the interest rate increases because the future cash flow is discounted more heavily. This aligns with the principle that higher interest rates reduce the value of money received in the future.

Review the options provided: Based on the explanation and formula, the correct answer is 'The present value decreases as the interest rate increases.' This is consistent with the mathematical relationship between interest rate and present value.