Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?
A) The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now.
B) Both discount factors are greater than one.
C) Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be greater than the present value of the $800.
D) Since the payments are different, no statement can be made regarding the discount factors.
E) You should factor in the time differential and choose the payment that arrives the soonest.

Question

Quizplus · Accepted Answer

The discount factor decreases as the time period increases, meaning the further in the future a cash flow is, the smaller its present value. Therefore, the discount factor for a cash flow ten years away is always less than or equal to the discount factor for a cash flow seven years away, assuming the same interest rate for both.

Suppose You Are Trying to Find the Present Value of Two