What does it mean if the present value is greater than the future value?

What does it mean if the present value is greater than the future value?

• A. Future cash flows are less influential
• B. The interest rate is high
• C. The investment is not growing over time
• D. Current capital is being invested poorly

Answer: (C)

When the present value is greater than the future value, it indicates that the investment is not experiencing growth over time. This scenario typically suggests that the cash flows expected in the future are either not substantial enough to outpace inflation or that the rate of return on the investment is inadequate to yield a higher future value than its current worth. Essentially, when future value diminishes compared to present value, it reflects a stagnation or deterioration in the value of the investment, making it clear that the capital employed is not generating the expected returns. This situation can also highlight inefficiencies in capital allocation, where funds might not be optimally utilized to generate growth.

When the present value is greater than the future value, it indicates that the investment is not experiencing growth over time. This scenario typically suggests that the cash flows expected in the future are either not substantial enough to outpace inflation or that the rate of return on the investment is inadequate to yield a higher future value than its current worth. Essentially, when future value diminishes compared to present value, it reflects a stagnation or deterioration in the value of the investment, making it clear that the capital employed is not generating the expected returns. This situation can also highlight inefficiencies in capital allocation, where funds might not be optimally utilized to generate growth.