TVM: n which of these circumstances would

In which of these circumstances would the present worth increase when the interest rate increases?

Question options:

  • A simple loan when you receive cash now and pay over time.
  • A cash flow that contains a geometric gradient series.
  • A simple investment, where you have a cost now and benefits later.
  • Any cash flow that has a higher present worth than future value.

Answer:

A simple loan when you receive cash now and pay over time. The logic is that as the MARR increases, the cash flows in the future become less and less important, getting discounted more and more. With a loan, the costs are becoming less and less important. You can even imagine that as the interest rate tends to infinity, nothing in the future matters and you only have the benefits of the inflow of cash now.

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