Answer:
1 and 3 option
Explanation:
Which of the following statements are correct concerning the present value of $1.00 five years from today discounted at 5%? The present value is equal to $1.00 divided by 1.05 to the 5th power and If the discount rate were more than 5%, the present value would be smaller.
To calculate present value:The present value is equal to $1.00 divided by 1.05 to the 5th power, Therefore
Present value= the future value/(1+r)n where n=5, r= 0.005 or 0.006
which will be 1/(1+0.05)5
=0.78
Note:The present value interest factor for a single sum is always equal to or less than 1 and the further in time, the smaller the present value interest factor
Answer:
Statements I and III
Explanation:
I)
Using the formula
Present value= Future value/(1+r)^n
where:
future value= $1
r is the interest rate,
n is the investment time period
Present value= 1/(1+5%)^5 (raise to the 5th power)
=$0.78
Note that ideally the value of a dollar should be less in the future using the time call value of money factor. Thus this statement is correct.
III)
If the discount rate is less than 5% to achieve a future value of $1.00 at the end of 5 years, the present value should be bigger.
Assume the discount rate is 4.9%
Present value=
1/(1+4.9%)^5 (raise to the 5th power)
=1/(1+0.045)^5
=1/1.049^5
=$1.27 (Correct since the present value is bigger)
