Final answer:
In order to compare amounts of money at different points in time, it is necessary to use the concept of Present Value (PV) and Future Value (FV) with a discount factor. The correct answer to the given question is b) Present Value (PV) is greater than Future Value (FV).
Step-by-step explanation:
In order to compare amounts of money at different points in time, it is necessary to use the concept of Present Value (PV) and Future Value (FV) with a discount factor. The correct answer to the given question is b) Present Value (PV) is greater than Future Value (FV).
When comparing amounts of money at different points in time, the Present Value (PV) represents the current value of future cash flows, while the Future Value (FV) represents the value of an investment at a future point in time. The discount factor is used to calculate the present value by adjusting the future value based on the interest rate and the time period.
For example, if you have $100 that you can invest at an annual interest rate of 5% for 5 years, the future value (FV) of your investment would be calculated as $100 * (1 + 0.05)^5 = $128.38. This represents the amount you would have at the end of the 5-year period.
However, if you want to compare this amount to the present value (PV), you would need to discount it back to the present using the formula PV = FV / (1 + i)^n = $128.38 / (1 + 0.05)^5 = $100. Option b