Question

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now?

a) remains constant

b) increases

c) decreases

d) becomes negative

e) cannot be determined from the information provided

Answer 1

Answer:

The present value will increases

Explanation:

The formula of the present value is:

FV=PV * (1+r)∧t

FV=future value of the investment,  

PV= present value,

r = stated interest rate,  

t = time in years

We still get  the $10,000 at the graduation,  as the number of years will decrease, the present value must increase.

Answer 2

Answer:

increases

Explanation:

Present value is based on the time value of money. Money received now is worth more than money received in the future. It follows that money received in two years would be worth more and thus have a higher present value than money received in three years.

I hope my answer helps you