The equations below show the discounted or present value of cash flows either one year or twenty years in the future. The first equation in each set of three shows the discounted value when the...

PV of $100 due in 1 year @ r=5.0%:$1001.051=$95.24\text {PV of } \$100 \text{ due in 1 year @ } r = 5.0\% : \large{\frac {\$100} {1.05^1}} \normalsize = \$95.24PV of $100 due in 1 year @ r=5.0%:​1.05​1​​​​$100​​=$95.24

PV of $100 due in 1 year @ r=5.0%:$1001.0501=$95.24\text {PV of } \$100 \text{ due in 1 year @ } r = 5.0\% : \large{\frac {\$100} {1.050^1}} \normalsize = \$95.24PV of $100 due in 1 year @ r=5.0%:​1.050​1​​​​$100​​=$95.24

Percentage change due to different r=$95.24−$95.24$95.24=0.0%\text {Percentage change due to different } r = \large \frac {\$95.24 - \$95.24} {\$95.24} \normalsize = 0.0\%Percentage change due to different r=​$95.24​​$95.24−$95.24​​=0.0%

PV of $100 due in 20 years @ r=5.0%:$1001.0520=$37.69\text {PV of } \$100 \text{ due in 20 years @ } r = 5.0\% : \large{\frac {\$100} {1.05^{20}}} \normalsize = \$37.69PV of $100 due in 20 years @ r=5.0%:​1.05​20​​​​$100​​=$37.69

PV of $100 due in 20 years @ r=5.0%:$1001.05020=$37.69\text {PV of } \$100 \text{ due in 20 years @ } r = 5.0\% : \large \frac {\$100} {1.050^{20}} \normalsize = \$37.69PV of $100 due in 20 years @ r=5.0%:​1.050​20​​​​$100​​=$37.69

Percentage change due to different r=$37.69−$37.69$37.69=0.0%\text {Percentage change due to different } r = \large \frac {\$37.69 - \$37.69} {\$37.69} \normalsize = 0.0\%Percentage change due to different r=​$37.69​​$37.69−$37.69​​=0.0%

5101520%Int=5

1.What is the percentage change in the PV of $100 due in 1 year when the interest rate changes from 5% to 10%? (Move the slider to 10%.)

1. Decreases by 60.6%


2. Decreases by 4.33%


3. Decreases by 4.5%


4. Does not change


5. Increases by 4.5%


6. Increases by 60.6%

-Select-abcdefItem 1

2.What is the percentage change in the PV of $100 due in 20 years when the interest rate (cost of capital) changes from 5% to 10%?

1. Decreases by 60%


2. Decreases by 22.83%


3. Does not change


4. Increases by 22.83%


5. Increases by 60.6%

-Select-abcdeItem 2

3.The impact of interest rate changes in the PV of $100 due in 20 years compared to the PV of $100 due in one year are:

1. smaller because interest rate changes have a greater impact on the near-term cash flows than distant cash flows.


2. the same because the cash flow is the same.


3. greater because interest rate changes have a greater impact on distant cash flows than near-term cash flows.


4. sometimes less and sometmes more depending on the interest rate.

-Select-abcdItem 3

4.If the interest rate is less than 5%, then the PVs for both the one-year and 20-year investments:

1. Decrease because the interest rate is lower.


2. Increase because the investments are discounted at a lower rate.


3. Do not change becasue the investment amount is the same.


4. Might either increase or decrease.

-Select-abcdItem 4