P Flag question You plan to analyze the value of a potential investment by calcu

Question

P Flag question 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? Select one: O a. 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 O b. The riskiness of the investment's cash flows decreases. O c. The discount rate decreases. O d. 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. O e. The discount rate increases.

Explanation / Answer

Increase in discount rate lowers the calculated investment, hence option e is correct.

Discount rate is inversely proportionate to the investment, hence when investment increases, discount rate decrease and vice versa.

Hence option e is correct.

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