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Present Value Calculation Quiz

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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?

$PV = FV * (1 + r)^n = 8000 * (1 + 0.12)^5$

$PV = \frac{FV}{(1 + r)^n} = \frac{8000}{(1 + 0.12)^5}$ (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?

$PV = 8000 * (1 + 0.12)^5$

$PV = 8000 * (1 + 0.15)^5$

$PV = \frac{8000}{(1 + 0.15)^5}$ (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%?

The present value remains the same

The present value decreases (correct)

The present value increases

The present value becomes zero

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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Description

Test your financial acumen with this quiz on present value calculation. Practice applying the present value formula to determine the current worth of future cash flows, considering compounding interest at a given rate. Perfect for those honing their skills in finance and investment analysis.