For this question, assume that the interest rate is greater than 0. Given this i
ID: 2811933 • Letter: F
Question
For this question, assume that the interest rate is greater than 0. Given this information and the information about the payments provided below, rank the following three sequences of payments according to their present value. Please provide an explanation for why.
"A" "B" "C"
2005 $190 $200 $210
2006 $200 $200 $200
2007 $210 $200 $190
Possible answers are:
A > C > B
C > B > A
B > A > C
A > B > C I belive it to be this one but it was incorrect? It still could be right I just need to know why.
C > A > B
Explanation / Answer
Answer:
According to me, the answer should be "C>B>A".
It shows the concept of the principal of time value of money. The current money is worth more than the same money tomorrow because of the passage of time. A dollar now is worth more than the dollar earned in the future.
We can calculate the present value by using this formula-
PV = C * [1 - (1 + i)-n / i]
where C is the cash flow, i is interest rate and n is the number of payments.
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