Suppose you are given a positive discount or interestcompoun

Suppose you are given a positive discount (or interest/compound) rate. If you calculated the PV (present value) of a series of equal cash flows, it will always exceed the FV (future value) of the same series of cash flows. True or False?

Solution

Answer:

The given statement is false.

Because the future value = Present value x (1 + rate )^n

and Present value = future value / (1 + rate )^n

where n is the number of period.

From the above equation we can clearly see that the future value is calculated by multiplying the compounding factor and present value is calculated by dividing the future value with compounding factor. So future value will always be greater that the present value whether it is a case of equal cash flows or not.