1.
What happens when you increase the expected rate of return?
Solution
Future value of an investment = Periodic savings x Future Value Interest Factor of Annuity,
FVIFA (r%, N periods)
As expected rate of return (r) increases, FVIFA increases. So, with periodic savings and N
remaining unchanged, higher rate of return will increase future value.
Same logic applies when we compute future value of a single lump-sum:
Future Value (FV) = Present Value (PV) x Future Value Interest Factor, FVIF (r%, N years)
Higher rate of return increases FVIF and increases FV (keeping PV and N unchanged).
Therefore, as expected rate of return increases, future value increases (and present value
decreases).