When valuing future cash flows why might it be appropriate to discount cash flow
ID: 2813089 • Letter: W
Question
When valuing future cash flows why might it be appropriate to discount cash flows received farther into the future at a higher rate?
The rate of inflation tends to increase over time.
It is typically less certain that cash flows promised farther into the future will be received.
Dollars received farther into the future are worth less than those received earlier.
Cash flows should always be discounted at the same rate if they are to be provided from the same source.
The rate of inflation tends to increase over time.
It is typically less certain that cash flows promised farther into the future will be received.
Dollars received farther into the future are worth less than those received earlier.
Cash flows should always be discounted at the same rate if they are to be provided from the same source.
Explanation / Answer
Correct answer is option (Dollars received farther into the future are worth less than those received earlier.)
Explanation;
As we know that every project generate cash inflows in the coming year in future. But it is also true that cash received in present have higher value in compare to cash received in coming years in the future that is why we need to discount cash flow received farther into the future at higher rate.
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