CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
Holding the future cash flow and discount rate constant, an increase in the time until the cash flow is received will most likely:
The present value will decrease. Present value equals the future amount divided by (1 + r) raised to the number of periods, so with a positive rate a longer wait increases the divisor and reduces what the cash flow is worth today.
- Adecrease its present valueCorrect
- Bleave its present value unchanged
- Cincrease its present value
Explanation
PV = FV/(1 + r)^N. A larger N raises the denominator for any positive r, so PV falls. Increasing PV or leaving it unchanged contradicts this relationship.
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