The present value of a future cash flow is the amount of money that, given current and projected interest rates, would grow to equal the exact amount of the future cash flow. For example, if $100 invested today would grow to $110 in one year, then the present value of $110 one year from now is equal to $100. Mathematically, this can be stated as:
PV=FVN(1+I)NPV=FVN1+IN
Where PVPV represents the present value of a future value FVFV, NN time periods from now, at an interest rate of II.
The process of calculating a present value from a future value (as well as the interest rate and periods) is referred to as discounting. The process of discounting is essentially the reverse of compounding (whereby you compute a future value from a present value). As is the case with compounding, discounting can be done via a step-by-step approach, a formula approach, using spreadsheet software (such as excel), and using a financial calculator. In the next stage of this problem, you will use a financial calculator to calculate present values in different scenarios.
According to the formula for calculating present values, an increase in the interest rate will the present value amount (all else equal).