What is the relation between the present value of an investment and time and interest rate?

 

A. The present value of an investment and the time value of money are very different. The time value of money means that a dollar received today is worth more than a dollar received at some time in the future. If a dollar is received today, it can be invested in some alternative activity that will provide a return. The less time you have to wait to receive cash and the greater the interest or discount rate, the greater the present value. The discount rate is the opportunity cost of capital: the interest earned on cash. So again, the present value is greater the longer the individual has to wait for the cash flow to occur and the greater the individual's discount rate. 

 

B. The present value of an investment is inversely related to both time and interest rate. The time value of money means that a dollar received today is worth less than a dollar received at some time in the future. The longer you have to wait to receive cash and the greater the interest or discount rate, the lower the present value. The discount rate is the opportunity cost of capital: the interest gained by waiting to receive cash. So again, the present value is reduced the longer the individual has to wait for the cash flow to occur and the greater the individual's discount rate.

 

C. The present value of an investment is inversely related to both time and interest rate. The time value of money means that a dollar received today is worth more than a dollar received at some time in the future. If a dollar is received today, it can be invested in some alternative activity that will provide a return. The longer you have to wait to receive cash and the greater the interest or discount rate, the lower the present value. The discount rate is the opportunity cost of capital: the interest lost by waiting to receive cash. So again, the present value is reduced the longer the individual has to wait for the cash flow to occur and the greater the individual's discount rate. 

 

D. None of the above.