Asked by Michelle McDade on Jul 24, 2024
Verified
Which of the statements below is correct about an increase in the discount rate
A) Will have no effect on net present value.
B) Will reduce the present value of future cash flows.
C) Will increase the present value of future cash flows.
D) Is one method of compensating for reduced risk.
Discount Rate
The rate of interest utilized within discounted cash flow methodology to calculate the current market value of future cash flows.
Net Present Value
The calculation of the current value of a series of future cash flows generated by an investment minus the initial capital cost.
Present Value
The current value of a future sum of money or stream of cash flows, given a specified rate of return.
- Recognize the importance of discount rates in the assessment of the present value of future cash flows.
Verified Answer
AP
Abhishek PattnaikJul 26, 2024
Final Answer :
B
Explanation :
An increase in the discount rate would increase the discounting factor used to calculate present values, thus reducing the present value of future cash flows. This is because the higher discount rate reflects a higher opportunity cost of capital, meaning that investors would require a higher return to forgo the use of their capital in the present.
Learning Objectives
- Recognize the importance of discount rates in the assessment of the present value of future cash flows.