**Present Value of a Monetary Investment**The present value (PV) of a certain monetary investment asset $ M_0 $, with yield $ M_t $ over a time period $ t $, is given by the relationship:\[ PV = M_t / (1+n)^t \]**Explanation of Parameters:**- $ M_0 $: Initial monetary investment.- $ M_t $: Yield or future value at time $ t $.- $ n $: Rate of return or discount rate.- $ t $: Time period.**Role of Parameter $ n $:**The parameter $ n $ represents the rate of return or the discount rate and plays a crucial role. It influences how future yields are discounted to determine their present value. A higher $ n $ decreases the present value, affecting the eventual terminal value of this monetary investment. Adjusting $ n $ allows investors to account for risk and opportunity costs over time.

2. The present value (PV) of a certain monetary investment asset Mo, with yield Mt over a time period t, is given by the relationship: PV = Mt/(1+n)'. Explain the role that the parameter n plays in determining the eventual terminal value of this monetary investment.

2. The present value (PV) of a certain monetary investment asset Mo, with yield Mt over a time period t, is given by the relationship: PV = Mt/(1+n)'. Explain the role that the parameter n plays in determining the eventual terminal value of this monetary investment.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter5: Business And Economic Forecasting

Section: Chapter Questions

Problem 2E

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Question

**Present Value of a Monetary Investment**

The present value (PV) of a certain monetary investment asset $ M_0 $, with yield $ M_t $ over a time period $ t $, is given by the relationship:

\[ PV = M_t / (1+n)^t \]

**Explanation of Parameters:**
- $ M_0 $: Initial monetary investment.
- $ M_t $: Yield or future value at time $ t $.
- $ n $: Rate of return or discount rate.
- $ t $: Time period.

**Role of Parameter $ n $:**
The parameter $ n $ represents the rate of return or the discount rate and plays a crucial role. It influences how future yields are discounted to determine their present value. A higher $ n $ decreases the present value, affecting the eventual terminal value of this monetary investment. Adjusting $ n $ allows investors to account for risk and opportunity costs over time.

Expert Solution

Present Value

Present value is the sum of money that must be invested in order to achieve a specific amount in the future.

PV = M_t/(1+n)^t

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