You believe that a certain asset, such as a business or shop, is going to be worth $100 million in five years.If the interest rate is 5 percent, then that asset will be worth $75 million today.

Question

Quizplus · Accepted Answer

The calculation for present value (PV) using the interest rate (r) and future value (FV) over a certain period of time (t) is PV = FV / (1 + r)^t. Using this formula, the present value of an asset expected to be worth $100 million in five years at an interest rate of 5 percent is actually $78.35 million, not $75 million. Therefore, the statement is false.

You Believe That a Certain Asset, Such as a Business