BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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compounding
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discounting
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both compounding and discounting
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none of the above
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Detailed explanation-1: -The formula used to calculate the present value (PV) divides the future value of a future cash flow by one plus the discount rate raised to the number of periods, as shown below. Where: FV = Future Value. r = Rate of Return.
Detailed explanation-2: -Calculating present value involves assuming that a rate of return could be earned on the funds over the period. Present value is calculated by taking the expected cash flows of an investment and discounting them to the present day.
Detailed explanation-3: -The present value formula is PV = FV/(1 + i) n where PV = present value, FV = future value, i = decimalized interest rate, and n = number of periods. It answers questions like, How much would you pay today for $X at time y in the future, given an interest rate and a compounding period?