Which of the following statements are correct concerning the present value of $1.00 five years from today discounted at 5%?
I.The present value is equal to $1.00 divided by 1.05 to the 5th power.
II.If the discount rate were less than 5%, the present value would be smaller.
III.If the discount rate were more than 5%, the present value would be smaller.
IV.If the $1.00 were to be received 6 years from today, the present value would be larger.
A)I and II only
B)I and III only
C)II and III only
D)I, III and IV only

Question

Quizplus · Accepted Answer

I. This statement is correct because the present value formula is: PV = FV/(1+r)^n, where PV is present value, FV is future value, r is the discount rate, and n is the number of periods. So, PV = 1/(1+0.05)^5 = 0.784.
II. This statement is also correct because a lower discount rate means the value is discounted less, leading to a larger present value.
III. This statement is incorrect because a higher discount rate means the value is discounted more, leading to a smaller present value.
IV. This statement is incorrect because the present value would actually be smaller because the value is further in the future and discounted more heavily.

Which of the Following Statements Are Correct Concerning the Present