You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? Select one: a. The discount rate increases. b. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. c. The discount rate decreases. d. The riskiness of the investment's cash flows increases. e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

Question

Allie Perkins

Business

26 August, 11:12

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? Select one: a. The discount rate increases. b. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. c. The discount rate decreases. d. The riskiness of the investment's cash flows increases. e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

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Answers (1)

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Emma Richmond · Answer 1

c. The discount rate decreases.

Explanation:

The explanation of given question is below:-

a. Present value of cashflow = cashflow : discounting factor. When present value of cashflow and net present value decreases, the discount rate increases.

b. In the second part when Increasing in discounting period and decreasing in magnitude of cash flow, both will have negative affect on the present value of cashflow. Hence net present value decreases.

c. If decrease in discount rate, Net present value and present value of cash flow increases.

d. Increases in risk of cashflow, discount factor and discount rate increases and net present value increases.

e. When cash flows grow further over time, their current value declines when their corresponding factor of discount increases. So, net present value is decreases.