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Questions and Answers
What is the present value of Rs. 8,000 due in 5 years, compounded annually at 12% interest?
What is the present value of Rs. 8,000 due in 5 years, compounded annually at 12% interest?
- $PV = FV * (1 + r)^n = 8000 * (1 + 0.12)^5$
- $PV = \frac{FV}{(1 + r)^n} = \frac{8000}{(1 + 0.12)^5}$ (correct)
- $PV = FV * (1 - r)^n = 8000 * (1 - 0.12)^5$
- $PV = \frac{FV}{(1 + r)^n} = \frac{8000}{(1 - 0.12)^5}$
If the interest rate was 15% instead of 12%, what would be the present value of Rs. 8,000 due in 5 years, compounded annually?
If the interest rate was 15% instead of 12%, what would be the present value of Rs. 8,000 due in 5 years, compounded annually?
- $PV = 8000 * (1 + 0.12)^5$
- $PV = 8000 * (1 + 0.15)^5$
- $PV = \frac{8000}{(1 + 0.15)^5}$ (correct)
- $PV = \frac{8000}{(1 + 0.12)^5}$
What happens to the present value if the time period is increased to 10 years instead of 5, while keeping the interest rate at 12%?
What happens to the present value if the time period is increased to 10 years instead of 5, while keeping the interest rate at 12%?
- The present value remains the same
- The present value decreases (correct)
- The present value increases
- The present value becomes zero
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Study Notes
Present Value Calculations
- To find the present value of a future amount, the interest rate and time period are crucial factors.
- The present value of Rs. 8,000 due in 5 years, compounded annually at 12% interest, is less than Rs. 8,000 due to the time value of money.
Effect of Interest Rate on Present Value
- If the interest rate increases from 12% to 15%, the present value of Rs. 8,000 due in 5 years, compounded annually, decreases.
Impact of Time Period on Present Value
- When the time period is increased from 5 years to 10 years, while keeping the interest rate at 12%, the present value of Rs. 8,000 decreases further.
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