Which of the following conclusions would be true if you earn a higher rate of re

Question

Which of the following conclusions would be true if you earn a higher rate of return on your investments? Select one: a. The greater the present value would be for any lump sum you would receive in the future. b. The lower the present value would be for any lump sum you would receive in the future. c. Your rate of return would not have any effect on the present value of any sum to be received in the future. d. The greater the present value would be for any annuity you would receive in the future.

Explanation / Answer

Correct option is  b. The lower the present value would be for any lump sum you would receive in the future.

For ex:

Present value of annuity = P×[1-(1÷(1+r)^n))]÷r

r is interest rate

P is payment per period

n is number of payments

Here, if interest rate, r increases, present value will decrease. Present value and interest rates have inverse relationship.

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