A higher discount rate applied to a given flow of returns in the future (e.g., $5,000 at the end of 5 years, $10,000 at the end

Question

2 years ago

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A higher discount rate applied to a given flow of returns in the future (e.g., $5,000 at the end of 5 years, $10,000 at the end

of 10 years, $15,000 at the end of 15 years, etc.) will cause the present value of that flow to _________.
a. remain unchanged if the future dollars do not change.
b. increase
c. decrease
d. change in a direction that cannot be determined in general.

Business

1 answer:

zhannawk [14.2K] · Answer 1 · 2023-10-07T14:06:41+03:00

Answer:

The correct option is B,decrease.

Explanation:

In calculating present value , the future value is divided by the discounting factor,hence, the higher the discounting rate, the higher the discounting factor.

Besides,since the relationship between future value and discounting factor is that of numerator-denominator relationship, it would be logical to say the higher the discounting factor , the lower the output of the mathematical operation,present value and vice versa.

From the foregoing, it is very clear a higher discount rate triggers a lower present value and vice versa