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 lower the calculated value of the investment?

A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

B) The discount rate increases.

C) The riskiness of the investment's cash flows decreases.

D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

E) The discount rate decreases.

Question

Business

Maximilian Hooper

31 October, 10:30

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 lower the calculated value of the investment?

A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

B) The discount rate increases.

C) The riskiness of the investment's cash flows decreases.

D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

E) The discount rate decreases.

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Answers (1)

Know the Answer?

Aden Blackwell · Answer 1

The answer is B. The discount rate increases

Explanation:

Investment value is the amount of money an investor would pay for a property. It refers to an asset's specific value based on certain parameters

The increase in discount rate will most definitely lower the calculated value of an investment.

Hence the correct answer is B