Your grandmother has promised to give you $5,000 when you graduate from college.She is expecting you to graduate two years from now.What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
A)remains constant
B)increases
C)decreases
D)becomes negative
E)cannot be determined from the information provided

Question

Quizplus · Accepted Answer

The present value of the gift will decrease if the graduation is delayed by one year and is received three years from now. This is because the longer the time period between the promise and receipt of the gift, the lower the present value due to the effect of time value of money. The value of money decreases over time due to inflation and other factors, which means that $5,000 received in the future is worth less than $5,000 received today. Therefore, delaying graduation by one year will decrease the present value of the gift.

Your Grandmother Has Promised to Give You $5,000 When You