Week 3 learning activity Understanding the Time Value of Money

Which of the following single cash payments (received at the future time indicated) has the highest present value? YOU WERE SURE AND CORRECT Short Time Period: Cash payment: $6,000 Paid in: 4 years Discount rate: 8% Which of the following future single cash payments has the lowest present value? YOU WERE SURE AND INCORRECT Low Discount Rate: Cash payment: $2,000 Paid in: 4 years Discount rate: 3% THE CORRECT ANSWER High Discount Rate: Cash payment: $2,000 Paid in: 4 years Discount rate: 12% Low Discount Rate: PV = $2,000 * (1 + .03)-4 = $2,000 / (1.03)4 = $2,000 / (1.13) = $1,769 Medium Discount Rate: PV = $2,000 * (1 + .08)-4 = $2,000 / (1.08)4 = $2,000 / (1.36) = $1,470 High Discount Rate: PV = $2,000 * (1 + .12)-4 = $2,000 / (1.12)4 = $2,000 / (1.57) = $1,274 When computing the future value of a single cash flow with a given interest rate, the _____ the time period, the ______ the future value. YOU WERE SURE AND INCORRECT