Certified Financial Planner (CFP) Exam 2025 – 400 Free Practice Questions to Pass the Exam

Question: 1 / 505

If a payment is made at the end of the year, how does it affect the present value calculation compared to a payment made at the beginning of the year?

It does not affect the calculation.

It increases the present value.

It decreases the present value.

When considering the timing of payments in present value calculations, it's essential to understand the impact of when a payment is made. In this case, if a payment is made at the end of the year rather than at the beginning, it results in a lower present value.

This occurs because present value calculations discount future cash flows back to the present time using a specified interest rate. A payment made at the end of the year has one less year to be discounted compared to a payment made at the beginning of the year. The earlier a payment is made, the less interest it accumulates before the present time, making it more valuable when discounted back.

Therefore, a payment at the end of the year reflects a lesser time value of money than a payment made at the beginning, resulting in a reduced present value. This principle is crucial for financial planning and investment valuation, as it highlights the importance of cash flow timing in calculating present value.

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It changes the interest rate needed.

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