The correct answer is: A. Compounding rate.
The future value interest factor (FVIF) is a financial concept that is used to calculate the future value of a sum of money that is invested at a given interest rate for a given period of time. The FVIF takes into account the compounding rate, which is the frequency at which interest is earned on the investment. The higher the compounding rate, the higher the future value of the investment.
The other options are incorrect because they do not affect the future value of an investment in the same way as the compounding rate. The discounting rate is used to calculate the present value of a future sum of money. The inflation rate and the deflation rate are economic factors that can affect the purchasing power of money, but they do not directly affect the future value of an investment.
Here is a more detailed explanation of each option:
- A. Compounding rate: The compounding rate is the frequency at which interest is earned on an investment. For example, if an investment earns 5% interest compounded annually, then the interest earned in the first year will be 5% of the initial investment. In the second year, the interest earned will be 5% of the initial investment plus 5% of the interest earned in the first year. This process continues for each year that the investment is held. The higher the compounding rate, the higher the future value of the investment.
- B. Discounting rate: The discounting rate is the rate at which future cash flows are discounted to their present value. This is done to account for the time value of money, which is the idea that money is worth more today than it will be in the future. The higher the discounting rate, the lower the present value of a future cash flow.
- C. Inflation rate: The inflation rate is the rate at which prices for goods and services are rising. When inflation is high, the purchasing power of money decreases. This means that the same amount of money will not be able to buy as much in the future as it can today.
- D. Deflation rate: The deflation rate is the rate at which prices for goods and services are falling. When deflation is high, the purchasing power of money increases. This means that the same amount of money will be able to buy more in the future than it can today.