Asked by Priya Puppala on May 14, 2024
Verified
Suppose an investment has cash inflows of R dollars at the end of each year for two years.The present value of these cash inflows using a 12% discount rate will be:
A) greater than under a 10% discount rate.
B) less than under a 10% discount rate.
C) equal to that under a 10% discount rate.
D) sometimes greater than under a 10% discount rate and sometimes less; it depends on R.
Cash Inflows
Money received by a business from its operational, financing, and investing activities.
Present Value
The immediate worth of anticipated money or streams of cash flows, computed with an agreed-upon rate of return.
Discount Rate
The interest rate used to discount future cash flows of a financial instrument; a measure of the time value of money.
- Calculate the present value and future value of cash flows using various interest rates.
- Demonstrate knowledge of the effects of changes in the discount rate on the present value of cash flows.
Verified Answer
MA
Muhammad AbubakarMay 17, 2024
Final Answer :
B
Explanation :
As the discount rate increases, the present value of future cash flows decreases. Therefore, with a higher discount rate of 12%, the present value of the cash inflows will be less than under a lower discount rate of 10%.
Learning Objectives
- Calculate the present value and future value of cash flows using various interest rates.
- Demonstrate knowledge of the effects of changes in the discount rate on the present value of cash flows.